To do these tasks, complete this table. An investor bought a racehorse for $14 M

Question

To do these tasks, complete this table.

An investor bought a racehorse for $14 M. The horse’s average winnings were $5,300,000 per year and expenses averaged $500,000 per year. The horse was retired after 2 years, at which time it was sold to a breeder for $9,500,000. Assuming 3 year MACRS life for a racehorse and an income tax rate of 39%, determine the investor’s after-tax rate of return on this investment. A. The before-tax cash flow for the first two years B. The book value at the end of the second year. C. The taxable income for each year. Be careful, the second year is different. D. The tax for each year. E. The after tax cash flow—Again, the second year is different. F. Assume MARR is 12%, calculate the Net Present Worth of this after-tax cash flow.

To do these tasks, complete this table.

End of yr Before tax cash flow BTCF Depreciation MACRS % Depreciation $ Taxable income Tax After tax cash flow ATCF Present Worth 0 1 2

Explanation / Answer

Year 0 Year 1 Year 2 Initial Investment $ 14,000,000 Cash flow from winning $ 5,300,000 $     5,300,000 Operating expenses $    500,000 $        500,000 Operating profit $ 4,800,000 $   14,300,000 MACRS 25% 37.50% Depreciation $ 3,500,000 $     5,250,000 Cash Flow before tax (Taxable income) $ 1,300,000 $     9,050,000 Income tax @39% $    507,000 $     3,529,500 After tax cash flow $    793,000 $     5,520,500 Add Depreciation $ 3,500,000 $     5,250,000 Cash flow $ 4,293,000 $   10,770,500 MARR 12% 0.89286 0.79719 PV $ 3,833,036 $     8,586,177 NPV = Sum of present value - Initial investment $(1,580,788) Intitial investment $14,000,000 Total depreciation for two years $ 8,750,000 Book value at end of two years $ 5,250,000

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