Dave is a medical device distributor in Nevada and runs his business as a sole proprietor....

Dave is a medical device distributor in Nevada and runs his business as a sole proprietor.

He therefore pays taxes on his business income as part of his individual income tax filing.

Currently his effective tax rate is 43.4%

He has recently been made aware of a new technology that can be used during surgery that

more effectively controls blood loss. Deployment of this technology would require purchasing

additional equipment and employing a couple of technicians to use the equipment at local

hospitals. He is seeking your advice on whether he should adopt this technology from a

financial perspective. The initial investment in the equipment would be $900,000. The

machine would operate for eight years, after which the machine would be worthless and Dave

is expecting to retire. In each of those eight years, he expects to generate revenue of $900,000

and have an operating margin of 19% (employee expenses and materials would run 81% per

year). He would depreciate the machine for tax purposes using straight-line depreciation over

the eight years. There would also be an initial investment in working capital of $135,000

which would be fully recovered at the end of the eighth year.

If dave makes this investment his tax rate will be 43.4%, and the required return will be 5% what is the NPV?

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jeff jeffy answered 1 year ago

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