Problem Statement You are projecting the purchase of a tire shop in Carp. The financial information on this potential investment includes: 1. Projected ownership of 4 years.

2. Rental revenues before taxes of $810,000 at EOY1 increasing annually thereafter by 1.5%.

3. Annual expenses before taxes of $435,000 at EOY1 increasing annually thereafter by 3%.

4. Todays asking price for the building is $1,750,000 with an expected selling price of $1,850,000 in 4 years.

5. The Canadian income tax rate on this type of investment is assumed to be 40% (on profits before taxes, capital gains or losses, terminal losses and on recaptured depreciation).

6. Buildings and equipment are to be depreciated using the DB method with a 20% depreciation rate.

7. The half-year rule applies to the depreciation of capital assets.

8. Working capital = $10,000.

9. You will need a $900,000 loan at a 10% rate to finance, in part, your purchase and the required working capital. The loan is to be repaid as follows: EOY1 = 15% of the total loan EOY2 = 25% EOY3 = 30% EOY4 = 30%

10. The annual inflation rate is 2.0%. 11. MARRs are: Before-taxes with inflation = 20.0% Before-taxes without inflation (inflation-free) = 18.0% After-taxes with inflation = 12.0% After-taxes without inflation (inflation free) = 11.0% BTCF = Before-Tax Cash Flows; ATCF = After-Tax Cash Flows CFOE = Cash Flows on Owner Equity

DD FF JJ MM RR END-OF-YEAR (EOY) Cash Flows 0 1 2 Annual revenues (AR) (Actual $) Annual costs (AC) (Actual $) 1. BTCF "Operations" (Actual $) CC 2. BTCF "SV" (Actual $) 3. BTCF "Working Capital" (Actual $) TGGTT 4. Total BTCF (Actual $) 5. BTCF "Operations" (Constant $) 6. BTCF "SV" (Constant $) 7. BTCF "Working Capital" (Constant $) 8. Total BTCF (Constant $) NN 1001 9. Annual Depreciation 10. Interest on loan II 11. Taxable Operating Income 11 12. Taxes on Operating Income IT 13. Capital gains II 14. Taxes on capital gains 15. Recaptured depreciation (or terminal loss) 16. Taxes on recaptured depreciation (or terminal loss) 17. ATCF "Operations" (Actual $) 18. ATCF "Operations" (Constant $) I 19. A TCF "SV" (Actual $) 20. ATCF "SV" (Constant $) 21. ATCF "Working Capital" (Actual $) 22. ATCF "Working Capital" (Constant $) 23. Total ATCF (Actual $) 24. Total ATCF (Constant $) 25. (=R10.) Interest on loan 26. Loan repayment 27. CFOE (Actual $) 28. CFOE (Constant $) - UU W WW XX The Annual Equivalent Worth (AEW) of the owners' after-tax inflation-free cash flows (nearest 100) is a) 56,800; b) 61,100; c) 76,200; d) 82,500 The Internal Rate of Return (IRR) of the owners' after-tax and inflation-free cash flows (closest whole percentage) is a) 13%; b) 17%; c) 19%; d) 22%. The present worth of the 4-year tax savings from depreciation is a) 289,200; b) 343,100; C) 377,400; d) 410,300. The cost (closest 1000) of the tire shop after the tax-savings from annual depreciation is a) 943,000; b) 1,406,900; C) 1,750,000; d) 1,850,000. DD FF JJ MM RR END-OF-YEAR (EOY) Cash Flows 0 1 2 Annual revenues (AR) (Actual $) Annual costs (AC) (Actual $) 1. BTCF "Operations" (Actual $) CC 2. BTCF "SV" (Actual $) 3. BTCF "Working Capital" (Actual $) TGGTT 4. Total BTCF (Actual $) 5. BTCF "Operations" (Constant $) 6. BTCF "SV" (Constant $) 7. BTCF "Working Capital" (Constant $) 8. Total BTCF (Constant $) NN 1001 9. Annual Depreciation 10. Interest on loan II 11. Taxable Operating Income 11 12. Taxes on Operating Income IT 13. Capital gains II 14. Taxes on capital gains 15. Recaptured depreciation (or terminal loss) 16. Taxes on recaptured depreciation (or terminal loss) 17. ATCF "Operations" (Actual $) 18. ATCF "Operations" (Constant $) I 19. A TCF "SV" (Actual $) 20. ATCF "SV" (Constant $) 21. ATCF "Working Capital" (Actual $) 22. ATCF "Working Capital" (Constant $) 23. Total ATCF (Actual $) 24. Total ATCF (Constant $) 25. (=R10.) Interest on loan 26. Loan repayment 27. CFOE (Actual $) 28. CFOE (Constant $) - UU W WW XX The Annual Equivalent Worth (AEW) of the owners' after-tax inflation-free cash flows (nearest 100) is a) 56,800; b) 61,100; c) 76,200; d) 82,500 The Internal Rate of Return (IRR) of the owners' after-tax and inflation-free cash flows (closest whole percentage) is a) 13%; b) 17%; c) 19%; d) 22%. The present worth of the 4-year tax savings from depreciation is a) 289,200; b) 343,100; C) 377,400; d) 410,300. The cost (closest 1000) of the tire shop after the tax-savings from annual depreciation is a) 943,000; b) 1,406,900; C) 1,750,000; d) 1,850,000