Question

B. Problem Statement You are projecting the purchase of a small restaurant in Kanata. The financial information on this potential investment includes: 1. Projected ownership of 4 years. Rental revenues before taxes of $600,000 at EOY1 increasing annually thereafter by $3,000. Annual expenses before taxes of $250,000 at EOY1 increasing annually thereafter by 2%. Today's asking price for the building is $950,000 with an expected selling price of $800,000 in 4 years. 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). Buildings and equipment are to be depreciated using the DB method with a 15% depreciation rate. The half-year rule applies to the depreciation of capital assets. Working capital = $2,000. You will need a $550,000 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 = 10% of the total loan EOY2 = 20% • EOY3 = 30% • EOY4 = 40% 10. The annual inflation rate is 1.0%. 11. MARRs are: Before-taxes with inflation = 15.0% Before-taxes without inflation inflation-free) = 14.0% After-taxes with inflation = 9.0% After-taxes without inflation (inflation free) = 8.0% BTCF = Before-Tax Cash Flow; ATCF = After-Tax Cash Flow; CFOE = Cash Flow on Owner Equity

What is the answer for 6th question ?

Answer 1

Answer for 6th Question:

Correct answer is:

b) 345,900

Working:

We calculate below the required cell:

Cash flows Annual revenues (AR) Actual $ Annual cost (AC) Actual $ 1. BTCF "Operations" Actual $ 2. BTCF "SV" Actuals 3. BTCF "Working capital" Actual $ 4.Total BTCF (Actual $) END-OF-YEAR (EOY) 1 2 3 $600,000 $603,000 $606,000 ($250,000) ($255,000) ($260,100) $350,000 $348,000 $345,900 4 $609,000 ($265,302) $343,698 $800,000 $2,000 $2,000 $350,000 $348,000 $345,900 $1,143,698

Hence option b is correct and other options A, C and D are incorrect.