r. Salim runs a carpentering business in his village. Mr. Salim’s business has expanded, with revenue now reaching 40,000 per year. Mr. Salim is considering moving his business into town centre premises, and employing another carpenter, who would cost 6,000 per year. He has found premises that could be leased for 3,500 per year payable in advance. Mr. Salim currently advertises his business in the local newspapers and business directories, at a cost of 1,000 per year payable in advance. Mr. Salim will carry on with this advertising, but he will also need extensive ‘one off’ advertising to promote the move to the new premises. This ‘one off’ advertising in the local newspapers will cost 2,000, which will be paid immediately. In addition to advertising the move in the local newspapers, Mr. Salim could advertise the move on the local radio. The cost of this would be 5,000, also payable immediately. Mr. Salim believes that having a town centre presence and the associated publicity in the local newspapers and local radio will increase revenue, by 45%. Overheads, excluding advertising, would increase to a total of 4,000 per year. Overheads currently charged to the business are 1,500 per year. Direct costs such as are budgeted at 5% of revenue. T

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter5: Introduction To Business Expenses

Section: Chapter Questions

Problem 56P: Hassad owns a rental house on Lake Tahoe. He uses a real estate firm to screen prospective renters,...

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Mr. Salim runs a carpentering business in his village. Mr. Salim’s business has expanded, with revenue now reaching 40,000 per year. Mr. Salim is considering moving his business into town centre premises, and employing another carpenter, who would cost 6,000 per year. He has found premises that could be leased for 3,500 per year payable in advance. Mr. Salim currently advertises his business in the local newspapers and business directories, at a cost of 1,000 per year payable in advance. Mr. Salim will carry on with this advertising, but he will also need extensive ‘one off’ advertising to promote the move to the new premises. This ‘one off’ advertising in the local newspapers will cost 2,000, which will be paid immediately. In addition to advertising the move in the local newspapers, Mr. Salim could advertise the move on the local radio. The cost of this would be 5,000, also payable immediately. Mr. Salim believes that having a town centre presence and the associated publicity in the local newspapers and local radio will increase revenue, by 45%. Overheads, excluding advertising, would increase to a total of 4,000 per year. Overheads currently charged to the business are 1,500 per year. Direct costs such as are budgeted at 5% of revenue. The cost of capital is 10% per annum. Determine the relevant cash flows associated with the proposed project.

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