Meow real estate ltd is a renowned real estate business. They have got a contract for a
Question:
Meow real estate ltd is a renowned real estate business. They have got a contract for a project called “Nagasaki” held in japan for 10 years. This new project requires Meow to have a separate department in their office where they can monitor the new project, the space they will work has been rented out to a third-party finance company. They were receiving rent of $45000 a year. Once the project is established, they can go back to renting it. Meow ltd got an offer for a used asset to be sold at $7000, whose written down value was 0. but instead of selling it, they decided to use it in their future project (Nagasaki) and discard after its completion. Few assets including machinery and vehicles have been valued at $300,000 and addition of $85,000 is required for installation. ATO set the asset life for 15 years, whereas business needs it for 10 years only. it is estimated that Meow ltd put $500,000 into market research for the project. Meow ltd needs extra inventory worth of $20,000. More experienced workers would be needed so salaries and wages would go from $63,000 to $75,000. Advertising at the initial stage is expected to be $25,000 and the existing advertising budget is predicted to reduce from $42,000 to $21,000 each year. Rent payment is reduced from $8000 to $4000 each year.
New workers are needed so training would be given, and training cost would rise $2000 to $3000 each year.
The new project is estimated to have $600,000 sales the first year and grow by 5% for 4 years and then by 8% till year 11. Material cost is expected to be 30% of sales each year except last year is estimated to be 18% of year 10’s sales.
Interest must be paid 10% each year on the $100,000 bank loan.
Insurance expenses are expected to rise by $10,000 each year due to the new project.
Due to poor communication and not aligned advertising leads to reduction of existing sales by $8000 each year and related costs fall by $3900 per year.
After the completion of the project, the assets bought would be sold at $105,000.
Cost of capital is 15% and tax rate of 30% is to apply.
1. What is the before-tax cash flow?
2. What is the Total cashflow?
3. What is the NPV?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill