9.21 R. Oliver and J. Rand have formed a corporation to franchise a quick food system for shopping malls. They have just completed experiments with the prototype machine which will serve as the basis of the operation. Because the system is new and untried, they have decided to conduct a franchises. The income statements below represent Oliver and Rand's best estimates of income from the mall operation for the next four years. At the end of the four-year period they intend to sell the operation and concentrate on the sale of and supervision of franchises. Based on the income stream projected, they believe the operation can be sold for $190,000; the income tax liability from the sale will be $40,000. 1. Calculate the cash flow for the mall operation for the four-year period beginning January 1, 1986, ignoring income tax implications. 2. Adjust the cash flows for the tax consequences as appropriate. Sales Less: Cost of goods sold Wages Supplies Personal property taxes Annual rental charge* Depreciation Development costst Total expenses Net income before taxes Less: Income taxes @ 40% Net income after taxes Projected Income For Years Ending December 31 1986 19X7 $120,000 $150.000 $ 60,000 $ 75.000 24,000 30,000 2,000 2,300 1.000 1,200 12.000 12,000 11.000 11,000 20,000 20,000 $130,000 $151,500 $(10,000) $ (1.500) -$ $(10,000) S (1.500) 1988 $200,000 $100,000 40,000 2,400 1,600 12,000 11,000 20,000 $187,000 $ 13,000 6008 $ 12,400 1989 $230,000 $110,000 44,000 3.200 1.800 12.000 11,000 20,000 $202.000 $ 28,000 11.200 $ 16,800 *The shopping mall requires tenants to sign a 10-year lease. Three years' rental is payable at the beginning of the lease period, with annual payments at the end of each of the next seven years. Construction of an operational machine is estimated to be completed on January 1, 1987. The $130,000 purchase price will be paid at that time. The salvage value at the end of its 10-year life is estimated at $20,000 Straight-line depreciation is to be used for statement purposes and sum-of-the-years-digits for tax purposes The prototype machine cost $200.000 to develop and build in 1986. It is not suitable for commercial use. However, since it was the basis of the system, it is to be amortized at $20,000 per year. The same amount will be deducted for tax purposes. $The losses of the first two years are offset against the $13,000 income in 19X8 before income tax charges are calculated