Question: Kim Huang an expert in architectural design and restoration of

Kim Huang, an expert in architectural design and restoration of historic buildings, has just received a $160,000 after-tax bonus for the successful completion of a project on time and under budget. Business has been so good that she is planning to retire in 15 years, spending her time travelling, enjoying outdoor activities, and doing charitable work. Huang is considering purchasing a small discount perfume shop that is available at a nearby factory outlet centre. The business can be purchased from its current owner for $160,000. The following information relates to this alternative:
a. Of the purchase price, $64,000 would be for fixtures and other depreciable items. The remainder would be for the company’s working capital (inventory, accounts receivable, and cash). The fixtures and other depreciable items would have a remaining useful life of at least 15 years but would be depreciated for tax-reporting purposes using a CCA of 20%. Salvage value is expected to be negligible at the end of 15 years, but the working capital would be released for reinvestment elsewhere.
b. Store records indicate that sales have averaged $325,000 per year and out-of-pocket costs have averaged $295,000 per year (before income taxes). These out-of-pocket costs include rent on the building, cost of goods sold, utilities, and wages and salaries for the sales staff and the store manager. Huang plans to entrust the day-to-day operations of the store to the manager.
c. Huang’s tax rate is 40%, and she wishes to use an after-tax discount rate of 10%, given the risk involved.
Should Huang purchase the perfume shop? Use the total-cost approach to discounted cash flow in your analysis and a discount rate of 10%.

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  • CreatedJuly 08, 2015
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