Question

Jojo Inc. is a profitable tax paying firm (pays taxes close to 10 million per year from other unrelated projects). Jojo is evaluating a new project where it expects project sales of 1.5 million this year, 2.2 million next year and zero sales after that. Sale price is a $14.50 and the cost to produce is $5.80 per unit. In order to have these profits, machinery must be purchased that costs 12 million dollars up front and which will be depreciated equally over the equipment’s useful life span of 3 years and an upfront RD expense must be made of 4 million dollars. Administration expenses are 3 million per year for the two project years. The firm pays a 40% tax rate.

2) What is Net income for time 1 and time 2?

A) Time 1: 2.4, time 2: 4.8

B) Time 1: 13.1, time 2: 19.1

C) Time 1: 5.2, time 2: 8.9

D) Time 1: 3.6 , time 2: 7.3

E) Time 1: 6.05, time 2: 12.14

Answer 1

Answer is:

D) Time 1: 3.6 , time 2: 7.3

Year	1	2
Sales	21750000	31900000
Variable Cost	8700000	12760000
Depreciation	4000000	4000000
Admin	3000000	3000000
Profit Before Tax	6050000	12140000
Net Income	3630000	7284000