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PROBLEM D: You are considering opening a new bar on Court Street. The initial necessary investment is $650,000. This investment has a projected salvage (or
PROBLEM D: You are considering opening a new bar on Court Street. The initial necessary investment is $650,000. This investment has a projected salvage (or residual) value for tax purposes of $250,000. The government requires depreciating the remaining $370,000 using the straight-line method over 10 years. You project that the bar will generate cash flows of $720,000 in revenue, $380,000 in variable costs, and $240,000 in fixed costs. 1. Assume that you are exempt from income taxes and that you can sell the bar for $380,000 at the end of 10 years. Using a 10% discount rate, what is the internal rate of return of the investment in the bar? Net Cash Flow: 720,000 - 380,000 - 240,000 = $100,000 Initial flow: -650,000 Year 1-9: 100,000 Year 10: 480,000 IRR = 13% 2. Now assume that you subject to a 25% marginal tax rate and that the resale value is the same as in part 2. What is the net present value of the investment in the bar? Annual after-tax cash-flow: Net after-tax resale value from selling the assets at end of year 10: Net Present Value
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