Your firm is considering a fast-food concession at the World's Fair in College Station. The cash flow pattern is somewhat unusual because you must build the stands, operate them for 2 years, and then tear the stands down at the end of the third year to restore the sites to their original condition (the stand sits idle for one year). Your firm requires a 15% pre-tax return on capital. Your firm anticipates having a marginal tax rate of 20% for the next three years. The IRS will allow your firm to depreciate the initial cost of the investment over two years. The cost of tearing down the booth is considered a tax deductible expense. You estimate that it will cost $900,000 to build and $200,000 to tear down at the end of the third year (assume the terminal value and after-tax terminal value are zero and treat the tear-down cost as an expense at the end of the third year). Your revenues will be $850,000 and operating expenses will be $200,000 at the end of each of the first two years from operating the concession stand.

A. Lay out the cast flows for the investment.

B. Calculate the net present value.

C. Is this an acceptable investment?

PLEASE SHOW WORK ON ALL PROBLEMS.

QUESTION 1

What is the after-tax Net Returns for the first and second year?

		-$200,000
		$650,000
		$520,000
		-$160,000
		None of the above

QUESTION 2

What is the after-tax Net Returns for the third year?

		-$200,000
		$650,000
		$520,000
		-$160,000
		None of the above

QUESTION 3

What is the tax savings from Depreciation?

		$450,000
		$180,000
		$60,000
		$90,000
		None of the above

QUESTION 4

What is the after-tax discount rate?

		12%
		15%
		3%
		10.0%
		None of the above

QUESTION 5

What is the present value of after-tax net returns?

		$900,000
		$764,941
		$17,046
		$152,104
		$0
		None of the above

QUESTION 6

What is the present value of the tax savings from depreciation?

		$900,000
		$764,941
		$17,046
		$152,104
		$0
		None of the above

QUESTION 7

What is the present value of the after-tax terminal?

		$900,000
		$764,941
		$17,046
		$152,104
		$0
		None of the above

QUESTION 8

What is the Net Present value?

		$900,000
		$764,941
		$17,046
		$152,104
		$0
		None of the above

QUESTION 9

Is this investment expected to be profitable?

		No, because the NPV is less than the required rate of return
		Yes, because the NPV is positive
		No, because the NPV is greater than the IRR
		No, because the NPV is negative
		None of the above