Question

*Help needed with parts d and e, other parts included because the info is needed to answer d and e

3. As owner of the Big Tap you are considering an investment in upgrading the bar's entertainment systems. If you decide to invest in these upgrades you have estimated it will require an initial investment of $48,000 which will be used to buy some TVs, a digital jukebox, and a new stereo system for the bar. You estimate that this will boost revenues by $15,000 during the first year because of the additional customers this will attract to the bar. These additional revenues are expected to increase by 3% each year. However, the upgrade will also create additional costs of $5,000 in the first year due to additional satellite service, and music and sports package fees. These additional costs are also expected to increase over time, but only by 2% each year. Your accountant says you can depreciate the initial investment using the straight-line method over 6 years, and your marginal tax rate is 25%. You estimate that the new sound and video equipment will have zero salvage value so the full $48,000 will be depreciated.

Answer 1

d.With Loan
Year	Inflows	Outflows	Depn.	Principal portion of Loan pmt.	Interest portion of Loan pmt.	Total loan pmt.(Prin.+Int.)	Taxable Income	Taxes	NATCF	PV F at at 10%	PV at 10%
1	2	3	4	5=4299.24-Col.6	6	7	8=2-3-4-6	9=8*25%	10=8-9+4	11=1/1.1^Yr.n	12=10*11
0		48000				24000			-48000	1	-48000
1	15000	5000	8000	2859.24	1440	21140.76	560	140	8420	0.90909	7654.55
2	15450	5100	8000	3030.79	1268.45	18109.97	1081.55	270.39	8811.17	0.82645	7281.96
3	15913.5	5202	8000	3212.64	1086.60	14897.32	1624.90	406.23	9218.68	0.75131	6926.13
4	16390.91	5306.04	8000	3405.40	893.84	11491.92	2191.03	547.76	9643.27	0.68301	6586.49
5	16882.63	5412.16	8000	3609.72	689.52	7882.20	2780.95	695.24	10085.72	0.62092	6262.44
6	17389.11	5520.4	8000	3826.31	472.93	4055.89	3395.78	848.94	10546.83	0.56447	5953.41
7	17910.78	5630.81		4055.89	243.35	0.00	12036.62	3009.15	9027.46	0.51316	4632.52
8	18448.11	5743.43					12704.68	3176.17	9528.51	0.46651	4445.12
9	19001.55	5858.3					13143.25	3285.81	9857.44	0.42410	4180.52
10	19571.6	5975.46					13596.14	3399.04	10197.11	0.38554	3931.43
Total								NPV of the Loan option=			9854.54

Workings for loan annuity amt.

24000=Pmt.*(1-1.06^-7)/0.06

Pmt.=24000/((1-1.06^-7)/0.06)=

4299.24

e. It is RECOMMENDED to upgrade the sound system as the investment returns POSITIVE NPV

It is advisable to pay CASH

as the NPV of the cash option is $ 13307.73 >

the NPV of the Loan option $ 9854.54