eBook Print Question 7 Not complete Mark 31.00 out of 42.00 P Flag question Net Present Value Analysis You have an opportunity to invest in a concession at a world exposition. To use the building and exhibits more fully, the venture is expected to cover a six-year period consisting of a preliminary year, the two years of formal exposition, and a three-year period of reduced operation as a regional exposition. The terms of the concession agreement specify the following: 1. At inception, a $60,000 deposit is paid to Global Expo, Inc., the promoting organization. This amount is returned in full at the end of the six years if the operator maintains the concession in order and keeps it open during scheduled hours. The deposit is not tax deductible, nor is its return subject to income taxes. 2. The operator must install certain fixtures that will cost $240,000. The fixtures become the property of Global Expo, Inc., the end of the six years. After careful investigation and consultation with local experts, you conclude that the following schedule reflects the estimated pre-tax income of the concession (amounts in thousands of dollars): Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $150 $435 $488 $300 $240 $180 75 228 170 140 106 Sales (all cash) Operating expenses Cash Tax depreciation Total expenses Pre-tax income 279 46 48 77 28 28 13 305 325 198 119 123 27 168 72 130 163 102 61 Assuming an income tax rate of 35% and a desired annual return of 12%, what is the net present value of this investment opportunity? Notes: Round answers to the nearest whole number. Use rounded answers for subsequent calculations. Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers. Enter answers below using complete numbers. Do not enter answers in thousands as shown above in the exhibit. For example, Year 1 Sales figure above shows as $150. be entered below as $150,000. Year 5 240,000 $ $ Year 1 150,000 $ 75,000 9,450 84,450 65,550 $ Year 2 435,000 $ 228,000 45,500 273,500 161,500 $ 0 x $ Year 3 488,000 $ 279,000 57,050 336,050 151,950 $ 0 x $ Year 4 300,000 $ 170,000 35,700 205,700 94,300 $ 140,000 25,200 165,200 74,800 $ Year 6 180,000 106,000 21,350 127,350 52,650 Cash sales Operating expenses Income taxes Total cash outflows After-tax cash inflows Present value Present value of net after-tax operating cash inflows Return of deposit in 6 years Total present value of future cash flows Investment required Net positive (negative) present value $ $ Ox $ 0 x $ 0 x $ 0X $ 0 x 0 x $ 0 X OX $ 0X What is the maximum amount that could be invested and still earning a 12% annual return? $ 454,873
