Tween Development(TD) is considering whether to purchase a building close to Changi airport.The building will be used to provide 500 car parking spaces.The cost of the building is $750,000 but further expenditure $250,000 will be required to develop the building including to provide access roads and suitable surfacing for car parking and also proper security system.TD is planning to operate the car park for three years.The building will be sold for $200,000 at the end of Year 3.A consultant has prepared a report detailing projected revenues and costs as follows:
| |
Year 1 |
Year 2 |
Year 3 |
| Revenues ($) |
750,000 |
770,000 |
850,000 |
| Repair and maintenance ($) |
175,000 |
200,000 |
230,000 |
| Other Operating Costs ($) |
155,000 |
170,000 |
250,000 |
The building will qualify for an annual allowance of 25% per year of straight line basis. TD is subjected to 25% tax rate and tax is payable in the same year when it is incurred.The company's cost of capital is estimated to be 15% per year.It is assumed that the initial capital investment will be incurred at the beginning of the first year and all other receipts and payments will occur at the end of each year.
(a) Compute the capital allowance qualified for the building in each of three years.
(b) Prepare a three-year statement which includes the taxable profit and tax payable for each year.
(c) Caluculate the Net Present Value (NPV) for the proposed project.
Tween Development(TD) is considering whether to purchase a building close to Changi airport.The building will be used to provide 500 car parking spaces.The cost of the building is $750,000 but further expenditure $250,000 will be required to develop the building including to provide access roads and suitable surfacing for car parking and also proper security system.TD is planning to operate the car park for three years.The building will be sold for $200,000 at the end of Year 3.A consultant has prepared a report detailing projected revenues and costs as follows:
| |
Year 1 |
Year 2 |
Year 3 |
| Revenues ($) |
750,000 |
770,000 |
850,000 |
| Repair and maintenance ($) |
175,000 |
200,000 |
230,000 |
| Other Operating Costs ($) |
155,000 |
170,000 |
250,000 |
The building will qualify for an annual allowance of 25% per year of straight line basis. TD is subjected to 25% tax rate and tax is payable in the same year when it is incurred.The company's cost of capital is estimated to be 15% per year.It is assumed that the initial capital investment will be incurred at the beginning of the first year and all other receipts and payments will occur at the end of each year.
(a) Compute the capital allowance qualified for the building in each of three years.
(b) Prepare a three-year statement which includes the taxable profit and tax payable for each year.
(c) Caluculate the Net Present Value (NPV) for the proposed project.