Question

Submit a written paper which is 4-5 pages in length, exclusive of the reference page, double spaced in Times New Roman font which is no greater than 12 points in size. The paper should cite at least three sources independent of the textbook.

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 WePROMOTE 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

Hello,

I have included the final NPV calculations of the project.

Tax Rate 30%
Discount Rate 7%
	Y0	Y1	Y2	Y3	Y4	Y5
Equipment Cost/Salvage Value	(105000)	0	0	0	0	5000
Expected Gross Revenues		25000	27000	27000	28000	23000
Expected annual cash outflows		(13000)	(12000)	(12000)	(12000)	(10000)
Depreciation		20000	20000	20000	20000	20000	=(105000-5000)/5
Tax saving on depreciation		6000	6000	6000	6000	6000	=20000*30%
Interest on Borrowed Funds ( Net of Tax Benefit )		(2205)	(2205)	(2205)	(2205)	(2205)	=105000*3%*(1-30%)
Net Cash Flow	(105000)	15795	18795	18795	19795	21795	(10025)
Discount Factor at 7%	1	0.934579	0.873439	0.816298	0.762895	0.712986
NPV of the Cash Flow	(105000)	14762	16416	15342	15102	15540	(27839)

Based on the above analysis, the project results in negative NPV and hence not viable to pursue it.