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Leroy Parrot is considering the possibility of starting a hardware business. Leroy would sell home products, supplies, and maintenance materials. He has determined that the

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Leroy Parrot is considering the possibility of starting a hardware business. Leroy would sell home products, supplies, and maintenance materials. He has determined that the initial cost of the store would be $725,000, which would enable him to lease the appropriate premises, purchase store fixtures, and provide working capital to purchase inventory and provide initial cash flow for the business. In order to obtain the funds necessary to accomplish this, Leroy intends to issue stock and borrow money to finance his operation. Leroy estimates that his cost of capital will be 8.5% on an after tax basis and he wants to earn at least this amount on this investment. Leroy has estimated that the store will generate a net cash inflow of $125,000 per year before depreciation, taxes, interest, and dividends. Depreciation expense is expected to be $10,000 per year, interest expense is expected to be $8,000 per year, and $10,000 of dividends will be paid in years 10 through 20. Leroy expects to operate the business for 20 years and then retire. However, Leroy wants to fully recover his original investment in 9 years or less. At the end of the 20 years, he expects to close down the store and have nothing of any value to sell since all net assets of the company will be used to pay off the bank loan and the common stockholders. Leroy expects that the corporation's tax rate over the life of the business will average 25%. REQUIRED: (1) Using the attached form, prepare an analysis to calculate the annual net income and annual net cash inflows after tax from the store for years 110 and years 1120. (2) Using the attached form, compute the payback period of the investment in the business on an after tax basis. Round your answer to two decimal places. (3) Using the attached form, compute the accounting rate of return on an after tax basis, using the initial investment as the investment base rather than the average investment. Round your answer to four decimal places (two decimal places for the percentage). (4) Using the attached form, compute the net present value of the investment on an after tax basis. Round your answer to the nearest whole dollar. If yo Explain your answer. LEROY PARROT \begin{tabular}{|l|l|l|} \hline (3) & \multicolumn{2}{|c|}{\begin{tabular}{c} LEROY PARROT \\ CALCULATION OF ACCOUNTING RATE OF RETURN \\ FOR CAPITAL INVESTMENT \end{tabular}} \\ \hline & Average Accounting Income From Capital Investment & \\ \hline & Divided By Initial Investment in Capital Investment & \\ \hline & Accounting Rate of Return on Capital Investment & \\ \hline & & \\ \hline \end{tabular} \begin{tabular}{|c|c|} \hline 17 & \\ \hline 18 & \\ \hline 19 & \\ \hline 20 & \\ \hline & \begin{tabular}{l} Total Present Value of After Tax Cash \\ Inflows From Capital Investment \end{tabular} \\ \hline & \\ \hline & \begin{tabular}{l} Less: Cost of Investment \\ Net Present Value (NPV) of Capital \\ Investment \end{tabular} \\ \hline & \\ \hline \end{tabular}

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