Question

Jon Snow is planning on opening a fight club for youths in Manhattan. The land will cost Jon $250,000, and the cost to build the arena on the land will be another $800,000. He plans on depreciating the cost of the arena over an 8 year period, using straight line depreciation and zero residual. Jon believes he will then be able to sell the land for $400,000 at the end of the 10 years, but will not recover any of the cost for the area. Jon expects annual revenues of $350,000 and operating costs (insurance, repairs, etc.) of $210,000. Annual Contribution Margin Annual Taxes on CM Annual Tax Shield Net cash flow, prior to disposal PV of disposal Required: Assuming a tax rate of 30-percent and an interest rate of six-percent, determine if this is a good investment for Jon Snow by determining the present value of the investment. Be sure to show your work for credit.

Answer 1

Annual Revenue			$350,000.00
Less: Operating Costs			$210,000.00
Contribution Margin			$140,000.00
Taxes @ 30%			$42,000.00
After Tax Contribution Margin			$98,000.00
Cumulative present value factor @ 6%			7.36
Present value of contribution Margin			$721,280.00		A
Cost of Arena			$800,000.00
Life			10 Years
Annual Depreciation			$80,000.00
Cumulative present value factor @ 6%			7.36
Present value of Annual Depreciation			$588,800.00		B
Disposal Value of land at end of 10 years			$400,000.00
Present value factor @ 6%			0.55839
Present value of disposal amount			$223,356.00		C
Present Value of Cash inflows from the investment				=	A+B+C
			=	$1,533,436.00	D
Present Value of Cash outflow of the investement
Cost of Land			$250,000.00
Cost of building the arena			$800,000.00
Total Cash outlfow of the investment			$1,050,000.00		E
Present Value of investment		D-E	$483,436.00