Contemporary Engineering Economics 6th Edition by Chan Park

تمرين 27

Sonja Jensen is considering the purchase of a fast-food franchise. Sonja will be operating on a lot that is to be converted into a parking lot in six years, but that may be rented in the interim for $800 per month. The franchise and necessary equipment will have a total initial cost of $55,000 and a salvage value of $10,000 (in today's dollars) after six years. Sonja is told that the future annual general inflation rate will be 5%. The projected operating revenues and expenses (in actual dollars) other than rent and depreciation for the business are
Assume that the initial investment will be depreciated under the five-year MACRS and that Sonja's tax rate will be 30%. Sonja can invest her money at a rate of at least 10% in other investment activities during this inflation-ridden period.
(a) Determine the cash flows associated with the investment over its life.
(b) Compute the projected after-tax rate of return (real or inflation-free) for this investment opportunity and justify whether or not it is worth undertaking.