Hi, I have some homework due tomorrow and I have no idea where to start with this question. Any help would be so greatly appreciated. Thanks.
Your firm is considering a fast‑food concession at the World's Fair in Fargo. 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 does not operate for first 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 of stands 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 cash flows for the investment.
B. Calculate the net present value.
C. Is this an acceptable investment?
Your firm is considering a fast‑food concession at the World's Fair in Fargo. 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 does not operate for first 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 of stands 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 cash flows for the investment.
B. Calculate the net present value.
C. Is this an acceptable investment?