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Menomonie McDenny's restaurant is considering investing in a kitchen in a renovated van, to sell food at outdoor events. The van will cost $90,000 to
Menomonie McDenny's restaurant is considering investing in a kitchen | ||||||||||
in a renovated van, to sell food at outdoor events. | ||||||||||
The van will cost $90,000 to outfit, and it will be sold in year 4 for $10,000. | ||||||||||
The van has a 5-year MACRS recovery period, for depreciation purposes. | ||||||||||
The van will generate $48,000 in revenues and have $12,000 in expenses each year. | ||||||||||
There is a 35% federal tax and a 10% state tax rate. | ||||||||||
McDenny's uses an interest rate of 20% per year. | ||||||||||
Use PRESENT WORTH analysis to determine whether or not to invest in the van. | ||||||||||
A. Find the book value of the van after 4 years. Then find the capital loss or depreciation recapture | ||||||||||
Year | dt | Depreciation | Book value | |||||||
0 | ||||||||||
1 | ||||||||||
2 | ||||||||||
3 | ||||||||||
4 | ||||||||||
Capital loss or depreciation recapture? | Sold for | $10,000 | ||||||||
Amount? | ||||||||||
B. Find the effective tax rate for this state: | ||||||||||
Effective tax rate: | ||||||||||
C. Fill in the following table to find the present worth of the after-tax cash flow for the van. | ||||||||||
Interest = | ||||||||||
Year | Gross income | Expenses | Depreciation | Capital gains | Taxable income | Taxes | Capital | Salvage | Net cash flow | |
0 | ||||||||||
1 | ||||||||||
2 | ||||||||||
3 | ||||||||||
4 | ||||||||||
Present value = | ||||||||||
D. Should McDenny's invest in the van? Why or why not? | ||||||||||
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