Carlos owns and operates a restaurant. To help expand his business, Carlos is considering the feasibility of offering a wedding catering service. To open this service, Carlos needs a van to deliver his food to the various weddings. After doing some research and price-checking, he has found a suitable new van online costing $55,000. Carlos will make a 25% down payment and finance the rest of the van with an amortized loan over 5 years at a 6.5% interest rate. Carlos predicts that by catering approximately 8 weddings a year at about $3,500 per wedding, he will increase his operating receipts by $28,000 per year. However, his operating expenses such as food, fuel, labor and insurance will increase by approximately $18,000 per year. Carlos assumed a straight-line depreciation over 8 years and the life of the investment is 5 years. The terminal value of the van is $30,000 after the 5 years, and Carlos requires a pretax 9% rate of return to capital. The marginal tax rate over the next 7 years is 23%.

(i) What is the appropriate discount rate to calculate the NPV in this problem?

a.6.5% b.6.93%

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(ii) What is the initial cost for the service?

a.$55,000 b. $,37,500

c. $38,000 d.$41,250

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(iii) What is the yearly allowable depreciation using the straight-line method?

a.$7,000 b.$,5,625

c.$6,875 d.$6,250

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(iv) What are the yearly after-tax net returns?

a.$7,700 b.$15,000

c.$9,240 d.$11,550

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(v) What is the after-tax terminal value?

a.$26,981.25 b.$30,000

c.$27,412.50 d.$27,843.75

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(vi) What is the NPV?

a.$27,061.07 b.$13,470.83

c.$13,789.98 d.$3,043.66

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(vii) What is the maximum operating expense for food, fuel, labor and insurance that can be spent on this investment and still be a good investment.

a. $17,558 b. $19,263

c. $18,967 d. $15,695