You are projecting the purchase of a small restaurant in Kanata. The financial information on this potential
Question:
You are projecting the purchase of a small restaurant in Kanata. The financial information on this potential investment includes:
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%
The annual inflation rate is 1.0%.
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.
answer the following questions:
1. The Net Present Worth (NPW) of the projects after-tax with inflation cash flows (nearest 100) is:
a) 365,000; b) 368,900; c) 372,000; d) 399,400.
2. The Internal Rate of Return (IRR) on stakeholder equity after taxes and without inflation (closest whole percentage) is: a) 23%; b) 29%; c) 35%; d) 39%.
3. The cost (closest $1,000) of the paving equipment before the tax savings from annual depreciation is:
a) 800,000; b) 950,000; c)1,000,000; d) 1,200,000.
4. The cost (closest $1,000) of the rental property after the tax savings from annual depreciation is:
a) 801,000; b) 826,000; c) 950,000; d) 1,000,000.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill