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 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.

• 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

Revised Sheet

Old Sheet

Computation of Net Present Value Discount Rate 7%) Tax Rate 30% Tax benefit Tax Depreciation on Expense expense Total Present Year Cashflows Depreciation on PBT CashfloWS PV factor Value Initial Investment Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Salvage Value Total 0 105,000 12,000 15,000 15,000 16,000 13,000 5,000 (29,000) 105,000 (3,600) 14,400 0.935 13,464 (4,500)16,500 0.87314,405 (4,500) 16,500 0.81613,464 (4,800)17,200 0.76313,124 (3,900) 15,100 0.713 10,766 0 39,778 105,000 1.00 20,000 20,000 20,000 20,000 20,000 6,000 6,000 6,000 6,000 6,000 4 5 5 5,000 (21,300)(20,300) 0 100,000 30,000 NPV Additional Cash inflow Cash Inflow Cash Outflow Net Cash inflow before tax 4 5 25,000 $13,000 12,000 27,000 $12,000 15,000 27,000 $12,000 15,000 28,000 $12,000$10,000 23,000 16,000 13,000 Cost Salvage Value Depreciable Amount Life Annual Depreciation 105,000 5,000) 100,000 5 years $20,000 Since the NPV of the project is negative, his business opportunity may NOT be pursued