Fall 2013 - Acct 285 - Excel Project Directions

Topics: Net present value, Internal rate of return, Rate of return Pages: 3 (1986 words) Published: October 20, 2014
Due Friday, November 15th at 1155 PM Kayla and Zhejia have always wanted to start their own consulting firm. Kayla and Zhejia have the opportunity to purchase an existing consulting firm for 500,000. The purchase price of 500,000 would be allocated 400,000 for the existing businesss building and 100,000 for the land on which the building sits. They plan to work for 15 years and then retire after selling their business to new owners. Start-up costs would include 40,000 in working capital which is to be used for advertising, salaries and supplies. They plan on naming their business KZ Consulting if they decide to invest their savings in its purchase. Kayla and Zhejia believe they can earn 12 by investing in the stock market so their cost of capital is equal to their opportunity cost of 12. Kayla and Zhejia believe a Simple Rate of Return on a project like this should be at least 30 because of the risk. They have made the following estimates Average consulting hours per week30 per owner Average charge to customer160.00 Average variable cost per hour112.00 Annual property tax11,000.00 Annual other cash fixed costs 140,000.00 Income tax rate39 Building tax depreciation per year20,000 Cost of capital12 Weeks each owner works a year48 Kayla and Zhejia expect the price they charge per hour to increase by 6 each year. Variable costs are expected to increase by 3 per year. All payments for costs are made in the year incurred. Depreciation is 20,000 per year so no calculation is need for depreciation. Each owner will bill 30 hours per week for 48 weeks. There will be no other employees. Kayla and Zhejia plan to sell the business for 1.5 times what they paid for the building and the land at the end of the 15th year (750,000). Neither the land nor the building will appreciate in value during the 15 year period. The gain on the sale of the business will equal the sales price minus the book value of the land and...
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