I have a question about the problem shown below. Q: Five Points Hat & Scarf Shop
ID: 1095073 • Letter: I
Question
I have a question about the problem shown below.
Q: Five Points Hat & Scarf Shoppe brings in $860,000 of revenue per year. Their cost of goods sold is $500,000 per year. Operating expenses are $200,000 per year. Income tax is 35%. At a discount rate of 10%, what is the annual worth of 5 years of operation?
The following table is what I did on excel, but I am not sure if this calculation is correct.
?1001,000=
500,000
+200,000
+860,000*0.35
sum of NPV (PV)
-675501
Since the formula of Annual worth is AW = PV*i*(1+i)^n/((1+i)^n-1) (where i=interest rate=0.1, n=period=5),
AW = -178195.4621
I didn't know how to use 35% of income tax rate, so I just multiplied it by $860,000 of revenue and summed up with the other cost.
Is the amout of AW obtained above correct? If not, I would like you to tell me where I made a mistake and what it is supposed to be.
Thanks.
year discout rate (r) r + 1 discout factor revenue cost net profit NPV 0 10% 1.10 1.000000 860000 1001000 -141000 -141000 1 10% 1.10 0.909091 860000 1001000 -141000 -128182 2 10% 1.10 0.826446 860000 1001000 -141000 -116529 3 10% 1.10 0.751315 860000 1001000 -141000 -105935 4 10% 1.10 0.683013 860000 1001000 -141000 -96304.9 5 10% 1.10 0.620921 860000 1001000 -141000 -87549.9?1001,000=
500,000
+200,000
+860,000*0.35
sum of NPV (PV)
-675501
Explanation / Answer
Calculate the net income first.
Particulars
Amount
Amount
Total revenue
$860,000
Less: Total expenses:
Cost of goods sold
$500,000
Operating expense
$200,000
Tax expenses ($860,000-$500,000-$200,000)
Particulars
Amount
Amount
Total revenue
$860,000
Less: Total expenses:
Cost of goods sold
$500,000
Operating expense
$200,000
Tax expenses ($860,000-$500,000-$200,000)
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