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 S60,000 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., at 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 Sales (all cash) $150 $435 $488 $300 $240 $180 Operating expenses Cash 279 75 228 170 140 106 Tax depreciation 48 77 46 28 28 13 Total expenses 123 305 325 198 168 119 27 130 163 102 72 61 Pre-tax income 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. The number would be entered below as $150,000. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 435,000 300.000 0 x 180,000 Cash sales 488.000 0 x 240.000 150.000 0 x Operating expenses 0x Ox 0 x 0 x 0 x 0 x Income taxes 0 x 0 x 0 x Total cash outflows 0 x 0 x 0x 0 xS 5 0 x After-tax cash inflows 0xs 5 5 0 xS 0 x 0 x s 0 x Present value 0xs 5 Present value of net after-tax operating cash inflows 0 x Return of deposit in 6 years Total present value of future cash flows 0 x Investment required 0 x 0 x Net positive (negative) present value What is the maximum amount that could be invested and still earning a 12% annual return? s 0
