You will retire in twelve years a developer who

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57. You will retire in twelve years. A developer who offers to buy your land for which you will receive $84,000 on an after-tax basis approaches you. However, if you sell your land you will have to give up (abandon) your business. On an after-tax basis, disposing of your building would bring $7,500. If you stay in business, the after-tax annual EAC from the needed building renovation would be $5,400. The before-tax cash flows from your business are $30,000 per year, and your tax rate is 25% on this amount. Your required return is 12%. If you sell your business, you have a job offer for $8,000 per year on an after-tax basis until you retire in 12 years. At that time you could sell your land but would only realize what you could receive today. You will not abandon your business unless you can become at least $20,000 wealthier. Should you abandon your business? a. No, the NPV is only $13,705. b. No, the NPV is only $13,571. c. Yes, the NPV is greater than $50,000. d. Yes, the NPV is greater than $20,000. [ ANSWER: In working this problem, the positive and negative signs are reversed from what they would normally be, because you are selling, rather than undertaking, the project. We have: NPV = PV sale of land + PV sale of building + (EAC saved renovation )(PVAF 12%,12 ) – (Δ R – Δ E )(1 – T )(PVAF 12%,12 ) + Wages(1 – T)(PVAF 12%,12 ) – FV sale of building (PVF 12%,12 ) = $84,000 + $7,500 + $5,400(PVAF 12%,12 ) – $30,000(1 – 0.25)( PVAF 12%,12 ) + $8,000(PVAF 12%,12 ) – $84,000(PVF 12%,12 ) = $84,000 + $7,500 + $33,450 – $139,373 + $49,555 – $21,561 = $13,571 . Thus, you will not sell your business because the NPV is less than the $20,000 you require.] a 58. You are thinking about abandoning your business. If you do, then you will receive $168,000 on an after-tax basis from the land associated with your business. Abandoning your business would bring $15,000 on an after-tax basis from sale of equipment; also, you would not have to repair equipment at a cost of $10,800 per year on an after-tax basis. The before-tax cash flows from your business are $60,000 per year. Your tax rate is 25% and your required return is 12%. If you abandon your business, you will be able to spend your time earning wages that are equivalent to receiving an annuity of $16,000 per year on an after-tax basis until you retire in 12 years. At that time you could sell your land but would only realize what you could receive today. Should you abandon your business if you can make more money doing that?
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[ would normally be, because you are selling, rather than undertaking, the business. We have: NPV = PV sale of land + PV sale of equipment + (EAC repairs saved )(PVAF 12%,12 ) – (Δ R – Δ E )(1 – T )(PVAF 12%,12 ) + Wages(PVAF 12%,12 ) – FV sale of land (PVF 12%,12 ) = $168,000 + $15,000 + $10,800(PVAF 12%,12 ) – $60,000(1 – 0.25)( PVAF 12%,12 ) + $16,000(PVAF 12%,12 ) – $168,000(PVF 12%,12 ) = $168,000 + $15,000 + $66,900 – $278,746 + $99,110 – $43,122 = $27,142 . Thus, abandon your business since you can make $27,142 more that doing that.] c
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