Question

Submit a 3-4 page written paper following the APA format, exclusive of the title and reference pages. The Abstract is not required or needed. Papers should be double spaced in Times New Roman font and 12 point size. The paper must cite at least one other validated (peer-reviewed) source independent of the textbook.

In this paper, please discuss the following case study. For you to complete this assignment you must:

• Explain your approach to the problem.
• Support your approach with references, and execute your approach.
• Provide an answer to the case study’s questions 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 smartphones. The case is very durable, attractive and fits virtually all models of smartphone. 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 the prior case involving this company, more details of the project become apparent and with more precision and certainty.

The following are the final values to the data:

• The cost of the equipment will be $70,000 and this cost is incurred prior to any cash is received by the project.
• The expected annual cash revenue of the project will be $30,000.
• The expected annual cash outflows (expenses/costs) are estimated at being $11,000, excluding depreciation.
• Your tax rate is 30% and you plan to depreciate the equipment on a straight-line basis for the life of the equipment. The discount rate you are assuming is 6%.
• After 5 years the equipment will stop working and there will be no salvage value.

Requirements of the paper:

• Perform the final NPV calculations and provide a narrative on how you calculated the computations and why (justification of answer).
• Present your calculated answers in schedule format (a table) along with your narrative. Microsoft Excel is also recommended for calculating and creating a table (your schedule).
• Then provide a summary conclusion on whether you should continue to pursue this business opportunity.
• Research, using at least one other 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. Include a table with your analysis to present your work.
• Provide a conclusion on whether this business opportunity should be pursued.

Answer 1

Net present value are computed by estimating the present value of cashflows (outflows and inflows) of the machinery over its useful life. Cashflows over the useful life of machine can be classified into three heads - Initial outlay, intermediate or operating cashflows, terminal cashflows.

1. Initial outlay deals with the initial investment made into the equipment,i.e., purchase cost, installation cost and other investments to utilise the machinery.
2. Intermediate cashflows deal with revenue and cash expenses arising out of machinery usage over its useful life. Here non cash expenses are not considered as they do not impact the cash outflows, however non cash expenses bearing an impact on the tax deducted like depreciation are conasidered. Depreciation happens to be a tax shield which is taken into account for tax shield and later added back to the profit after tax to arrive at cashflows after tax.
3. Terminal cashflows deal with the sale / disposal of machinery and related cashflows. It also may include final working capital (reaping out) cashflows in some cases.

NPV computation

Note 1 : Cash outflows are shown negative and cash inflows are shown positive

Note 2 : Intermediate cashflows from year 1 to 5 are the same

Note 3 : Depreciation computation (using straight line depreciation over useful life)

Purchase cost of machine	70,000.00
Useful life of machine	5
Annual depreciations (Purchase cost / useful life)	14,000.00

Note 4 : No salvage value of machinery at the end of year 5

Note 5: Discount rate used ---> 6%

Cashflow table

Year	0	1-5	5
Total Initial cash outlay	(70,000.00)
Intermediate cashflows
Cash Revenue		30,000.00
Less : Cash outflows (expense / cost)		11,000.00
Profit before depreciation and tax (PBDT)		19,000.00
Less : Depreciation		14,000.00
Profit before tax ---> PBT --->(PBDT - Depreciation)		5,000.00
Less : Tax @ 30% on PBT		1,500.00
Profit after tax --> PAT --> PBT - Tax		3,500.00
Add : Depreciation		14,000.00
Cashflows after tax (PAT + Depreciation)		17,500.00
Terminal cashflows
Salvage value of machine			-
Net cashflows (Initial + Intermediate + Terminal)	(70,000.00)	17,500.00	-
Present Value factor @ 6% for year 0 and year 5 --> 1/ (1+6%)^nth year Present Value factor for annuity @ 6% for year 1 to 5 ---> (1-(1+6%)^-n)/6%	1.00	4.21	0.75
Present value of cashflows	(70,000.00)	73,716.37	-
Net Present Value (Sum of present value of cashflows)	3,716.37

Depreciation tax shield : Lets take a case where depreciation is not considered in arriving at operating cash outlfows (as it a non cash expense). Here, Profit before tax would be $ 19000 ---> (30000-11000) and tax exense would be $5700 ---> (19000 x 30%). From the above table we can notice that depreciation has worked out to be a tax shield whereby it has reduced the tax expense to $ 1500 leading to tax savings shield of $ 4200 --> (5700-1500).

Business opportunity decision : From the above table we can also note that Net present value is positive, which means present value of cash inflows are higher than present value of cash outflows Hence, machine can be accepted.

Hope this helps you answer the question. Please leave your feedback or rating on the answer.

Thanks