Suppose you are considering opening a food truck on Warren Street, near NJIT. Yo

Question

Suppose you are considering opening a food truck on Warren Street, near NJIT. You will name this food truck the Eiffel Tower and you intend to operate it for three years. The Eiffel Tower and all equipment requires a $750,000 initial investment. The Eiffel Tower will be depreciated straight line to zero over the three year life of this project. You estimate that you can generate annual sales of $560,000 with annual costs of $275,000. Your discount rate is 5% and your tax rate is 35%.

Part A) Should you invest in the Eiffel Tower?

Part B) Suppose Congressional legislation changes tax policy so that your new tax rate is 25%. Does this policy affect your decision (explain and show all of your work).

Part C) Based on the initial conditions, suppose a Federal Reserve interest policy change decreases your discount rate to 4%. Does this policy affect your decision (explain and show all of your work).

Additional Requirements

Level of Detail: Show all work

Explanation / Answer

a)

step1 :

find depreciation per year and earnings before income and tax and depriciation(EBITD)

depreciation per year = 750000/3 = 250,000

EBITD = revenues - costs = 560000 - 275000 = 285,000

step2:

find Operational cash flow(OCF)

OCF = (EBITD - Depriciation) * (1-taxrate) + depreciation

= (285000 - 250000) * (1-35%) + 250000

= 272750

step3:

calculate Net present value

NPV = -intial investment + present value of cash flows

= -750000 + 272750 * [1-(1+5%)^-3]/0.05

= -7234.10

Since NPV is negative, one should not invest

b)

step1:

calculate New OCF under taxrate of 25%

OCF = (285000 - 250000) * (1-25%) + 250000

= 276250

step2:

calculate Net present value

NPV = -intial investment + present value of cash flows

= -750000 + 276250 * [1-(1+5%)^-3]/0.05

= 2297.27

Since NPV is positive, one should invest

c)

calculate NPV at discount rate of 4%

NPV = -intial investment + present value of cash flows

= -750000 + 272750 * [1-(1+4%)^-3]/0.04

= 6906.08

Since NPV is positive, one should invest

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