Alice rents bikes on Orcus Island. In her current operation with 20 bikes Alice

Question

Alice rents bikes on Orcus Island. In her current operation with 20 bikes Alice can generate $16,000 in after tax net revenue each year. Alice is considering expanding her operation to renting 40 bikes which will generate $35,000 in annual revenue and will have operating (production) costs of $12,000. Alice also has to pay a 10% tax to the government. She can finance the purchase of 20 additional bikes, which cost $400 each, by borrowing $8000 at a 5% annual real interest rate. Assume that the additional 20 bikes can always be resold for the original purchase price of $400.

A. Determine Alice

Explanation / Answer

A) Alice's Net revenue = 35,000 - 12,000 = 23,000

B) Alice's Tax Liability = 23,000 x 10% = 2300

C) After Tax net Revenue = 23000 - 2300 = 20,700

D) Alice

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