Question

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

Question Summary : Case of WePROMOTE company

Capital Budgeting exercise for their new project with following details :

cost of the equipment will be $70,000

expected annual cash revenue of the project will be $30,000.

expected annual cash outflows (expenses/costs) are estimated at being $11,000, excluding depreciation.

tax rate is 30%

discount rate is 6%

depreciate the equipment on a straight-line basis over 5 years life

no salvage value.

Solution :

NPV Calculation for the project

For NPV. Cash flow for each of the 5 years of the project will be calculated

Calculation of Annual Cash flow

Particulars	Amount in $	Narrative/ Explanation
cash revenue	30000	Given :expected annual cash revenue of the project will be $30,000.
Less : Cash Expenses	11000	Given : expected annual cash outflows (expenses/costs) are estimated at being $11,000, excluding depreciation.
EBDT	19000	Earnings before Depreciation and taxes
Less : Depreciation	14000	Given that depreciate the equipment on a straight-line basis over 5 years life. Depreciation = Cost of Equipment - salvage value / Life of the project 70000-0 / 5
EBT	5000	Earnings before tax
Less : Tax @ 30%	1500	Given Tax rate is 30%
PAT	3500	Profit after Tax
Add : Depreciaiton	14000	Depreciaion does not cause outflow of cash. It was deducted earlier as reduces the tax burden. Depreciaiton is a tax deductible expenses. It is added back as it caused no cash outflow
Annual Cash Flow	17500	Same Cash flow for all the 5 years

NET PRESENT VALUE @ 6% DISCOUNT

The present value interest factor (PVIF) is a formula used to estimate the current worth of a sum of money that is to be received at some future date. Since CASH FLOWS are to be earned in future NPV compares their present value to the initial cost. PVIF = 1/ (1+r) ^ n

where r= rate of discount and n is the number of years

Calcuation of NPV

YEAR	CASH FLOW	PVIF @ 6%	PRESENT VALUE OF CASH FLOWS Cash flow *PVIF
1	17500	0.943	16502.5
2	17500	0.89	15575
3	17500	0.84	14700
4	17500	0.729	12757.5
5	17500	0.747	13072.5
		Total PV of inflows	72608
		Less : Invesment	70000
		NPV	2608

NPV of the project is 2608 $

Conclusion :

Since NPV is positive, it indicates that the present value of inflows is more than the present value of outflows. Hence the porject is profitable. Hence this business opportunity can be pursued .