Reference no: EM133146351
Question - Carlos owns and operates a restaurant. To help expand his business, Carlos is considering the feasibility of offering a wedding catering service. To open this service, Carlos needs a van to deliver his food to the various weddings. After doing some research and price-checking, he has found a suitable new van online costing $50,000. Carlos will make a 25% down payment and finance the rest of the van with an amortized loan over 5 years at a 6.5% interest rate. Carlos predicts that by catering approximately 8 weddings a year at about $4,000 per wedding, he will increase his operating receipts by $32,000 per year. However, his operating expenses such as food, fuel, labor and insurance will increase by approximately $20,000 per year. Carlos assumed a straight-line depreciation over 8 years and the life of the investment is 5 years. The terminal value of the van is $30,000 after the 5 years, and Carlos requires a pretax 9% rate of return to capital. The marginal tax rate over the next 7 years is 23%, the inflation rate is 1% and the risk premium is 0.5%.
Required -
What is the down payment on the van?
a. $30,000
b. $50,000
c. $12,500
d. $37,500
What is the after-tax nominal return for year 3?
a. $12,120
b. $6,250
c. $9,519.98
d. $9,711.33
What is the principal payment in year 2?
a. $9,023.8
b. $6,586.30
c. $7,014.40
d. $37,500
What is the Net Cash Flow before debt in year 1?
a. $10,769.90
b. $2,290.98
c. $2,306.73
d. $9,332.40
What is the Net Cash Flow after debt in year 1?
a. $10,769.90
b. $2,290.98
c. $2,306.73
d. $9,332.40