Alice rents bikes on Orcus Island. In her current operation with 20 bikes Alice can generate $16,000 in after tax net revenue each year. Alice is considering expanding her operation to renting 40 bikes which will generate $35,000 in annual revenue and will have operating (production) costs of $12,000. Alice also has to pay a 10 percent tax to the government. She can finance the purchase of 20 additional bikes, which cost $400 each, by borrowing $8000 at a 5 percent annual real interest rate. Suppose that the additional 20 bikes can always be resold for the original purchase price of $400.
1. Determine Alice’s net revenue.
2. Determine Alice’s tax liability.
3. Decide Alice’s after tax net revenue.
4. Determine Alice’s financial benefit associated with the investment expenditure.
5. Determine Alice’s financial cost associated with the investment expenditure.
6. Must Alice undertake the investment? Explain.