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ABC decides to invest $300,000. The deal they strike is as follows: They are allowed to invest 1/3rd of their money on the first day
ABC decides to invest $300,000. The deal they strike is as follows:
- They are allowed to invest 1/3rd of their money on the first day of the deal (time 0), and the balance 2 years later.
Invested $100,000 on the first day. But first year doesnt have any income.
- However, due to the delayed investment, they wont get any revenue until year 2 at which time they will get $70,000, $60,000, $50,000 and $70,000 for each of years 2 through 5.
- In addition to the revenue noted for those 4 years, they will have expenses of $30,000, $30,000, $40,000 and $30,000 for years 2 through 5 (they dont have any expenses in time 0 or year 1 other than the already described original investment).
- They can deduct 100% of their operating expenses in year 2, 50% of their operating expenses in years 3 and 4, and 25% of their operating expenses in year 5.
- Their revenue is fully taxable in years 2 and 4 and 5, but only 50% taxable in year 3. In year 5, they are subject to tax on the portion of the revenue that was not previously taxed in year 3.
- At the end of the investment (time 5), they will get a return of their original investment of $350,000. Any gain or loss on the investment is taxable, if a gain, or deductible, if a loss. But, the tax rate on return of investment is only 20%
- You can carry losses back or forward.
- Their tax rate is 40% for ordinary income but not return on investment income.
- Their discount rate is 5%.
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