1. An avid paddler and entrepreneur, Johnny J-stroke has decided to start a new Thousand Island touring company in beautiful Gananoque. To start Passionate Paddling Company, a fleet of eight sea kayaks were purchased for $25,000 and for storage, a $4,000 shed was erected. Otherwise, Johnny launches off the dock on his own property and leads all tours personally or with his partner. Alternatively, he could hire a tour guide to do all the work at the cost of 15,000 per year. The first season tour bookings are set at $20,000, but revenue is expected to increase at 8% per year as retiring ‘boomers’ move to the region and day-trip to ‘Gan’. Johnny’s partner agreed to supply $3,000 in working capital for the first season but replacement of paddles, life-jackets, and bailers on an ongoing basis is expected to require a capital float of 15% of the following year’s revenues in the years to come. The appropriate tax rate for such a private company is 24%. Johnny also expects maintenance costs of $1000. These costs and the labor costs are expected to increase at 2% per year. The CCA rate is 15% for kayaks and 10% for the shed (assume that the asset pools terminate). a) If the two partners split all operating cash flows, what amount will each receive in each of years 1 to 10? Consistent with the normal capital budgeting process, include changes in working capital with the initial investment calculations below (not required here). b) The operation will shut down after ten years and Johnny will sell the kayaks to the local cub-scout troop for $2,000. His shed, a frame structure, will be barely standing. What is the NPV for the project? Johnny’s entrepreneurial required rate of return is 9%.c) If Johnny can get a loan at the Gananoque Credit Union at a pre-tax rate of 5% for half of the original investment, what is the approximate value of the NPV?
This question was answered on: Sep 21, 2023
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