I want to buy a race horse. The horse I am looking at is called “Super Fudge” is
ID: 2470895 • Letter: I
Question
I want to buy a race horse. The horse I am looking at is called “Super Fudge” is going to cost $180,000. The expenses associated to the horse are going to be $30,000 per year for 4 years. I am forecasting to win $90,000 per year racing this horse (4 years). I can write off the cost of the race horse since they are considered a 3-MACRS property. I am currently in the 25% tax bracket. I expect 10% on my money.
a. What would my Net Present Worth be for this investment before I considered taxes (draw a Cash flow diagram for full credit)? Should I buy the horse?
b. What would my depreciation be for the horse for years 1-4?
c. What would my taxes be for years 1-4?
d. What would my Net Present Worth on this project be after taxes are considered (draw a Cash flow diagram for full credit)? Should I buy the horse?
Explanation / Answer
Calculation of Net Present Worth of the Investment:
Year Income Exp. Dep. Total exp. PBT Tax PAT CFAT D.F@ 10% PVCF
1 90,000 30,000 59,994 89,994 6 2 4 59,999 0.9091 54,547
2 90,000 30,000 80,010 110,010 (20,010) (5,002) (15,008) 65,002 0.8264 53,717
3 90,000 30,000 26,658 56,658 33,342 8,335 25,007 51,665 0.7513 38,816
4 90,000 30,000 13,338 43,338 46,662 11,665 34,997 48,335 0.683 33,013
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Total Present Value of the cash inflows 180,093
Less: Initial Investment 180,000
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Net Present Value 93
Yes. The horse can be purchased, since it is generating net cash flow of $93.
Where,
PBT= profit before tax
PAT= profit after tax
CFAT= cash flows after taxes
Dep.= depreciation
Exp. =expenses
Note: Amounts are in $
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