Question

Please, this is the fifth time I am posting this question, all the answers I am getting are inaccurate because the experts are not putting all value into account like the loan interest rate, tax rate, depreciation, annual cash outflows, salvage value, annual cash inflows, and discount rate.

please also support the answer with a full interpretation and the step by step approach in solving the answer. thank you:)

In this paper, please discuss the following case study. In doing so, explain your approach to the problem, support your approach with references, and execute your approach. Provide an answer to the case study’s question with a recommendation.

This case continues following the new project of the WePPROMOTE Company, that you and your partner own. WePROMOTE is in the promotional materials business. The project being considered is to manufacture a very unique case for smart phones. The case is very durable, attractive and fits virtually all models of smart phone. It will also have the logo of your client, a prominent, local company and is planned to be given away at public relations events by your client.

As we know from prior cases involving this company, more and more details of the project become apparent and with more precision and certainty.

The following are the final values to the data that you have been estimating up to this point:

• You can borrow funds from your bank at 3%.
• The cost to install the needed equipment will be $105,000 and this cost is incurred prior to any cash is received by the project.
• The gross revenues from the project will be $25,000 for year 1, then $27,000 for years 2 and 3. Year 4 will be $28,000 and year 5 (the last year of the project) will be $23,000.
• The expected annual cash outflows (current project costs) are estimated at being $13,000 for the first year, then $12,000 for years 2, 3, and 4. The final year costs will be $10,000.
• Your tax rate is 30% and you plan to depreciate the equipment on a straight-line basis for the life of the equipment.
• After 5 years the equipment will stop working and will have a residual (salvage) value of $5,000).
• The discount rate you are assuming is now 7%.

Requirements of the paper:

• Perform the final NPV calculations and provide a narrative of how you calculated the computations and why.
• Then provide a summary conclusion on whether you should continue to pursue this business opportunity.
• Research, using at least three sources other than the textbook materials that support your calculations and conclusions.

Papers will be assessed on the following criteria:

• Provide the final, accurate NPV calculations.
• A narrative on how the NPVs were calculated. The narrative should include how the data relating to depreciation and its tax consequences affect the cash flow of the project.
• Supporting narrative based on research of sources other than the textbook materials.
• Provide a conclusion on whether this business opportunity should be pursued.

Answer 1

Year	0	1	2	3	4	5
1.Cost of equipment	-105000
2. After-tax salvage(5000*(1-30%))						3500
Operating cash flows:
3.Gross revenue		25000	27000	27000	28000	23000
4.Costs		-13000	-12000	-12000	-12000	-10000
5.Depreciation( $ 105000/5 yrs.)		-21000	-21000	-21000	-21000	-21000
6.EBT(3+4+5)		-9000	-6000	-6000	-5000	-8000
7.Tax expense (saved) at 30%		2700	1800	1800	1500	2400
8. EAT(6+7)		-6300	-4200	-4200	-3500	-5600
9.Add back :Depn.(Non-cash expense)		21000	21000	21000	21000	21000
10.Operating Cash Flow(OCF)(8+9)		14700	16800	16800	17500	15400
11.Interest tax shields(105000*3%*30%)		945	945	945	945	945
12. Net annual cash flows(1+2+10+11)	-105000	15645	17745	17745	18445	19845
13. PV F at 7%(1/1.07^Yr.n)	1	0.93458	0.87344	0.81630	0.76290	0.71299
14.PV at 7%(12*13)	-105000	14621.50	15499.17	14485.21	14071.60	14149.21
15. NPV(sum of Row 14)	-32173.32
16.IRR (of Row 12)	-5%
17. The project never does not payback within 5 yrs.
Recommendation--NOT TO PURSUE the project for the following reasons:
Net Present Values of the cash flows of the project is NEGATIVE
IRR of the project's cash flows is also nnegative at -5% & also < the discount rate 7%
Naturally, it does not pay back the initial investment.
Despite
taking into consideration,
the tax cash-outflow savings due to
1. non-cash expense of depreciation &
2. annual interest payments on the borrowings.