A) Someone in the 36 percent tax bracket can earn 9 percent annually on her investment in a tax-exempt IRA account. What will be the value of a one time $10,000 investment in 5 years? 10 years? 20 years?
b) Suppose the preceding 9 percent is taxable rather then tax-deferred and the taxes are paid annually. What will be the the after-tax value of her $10,000 investment after 5, 10, 20 years?
a) Someone in the 36 percent tax bracket can earn 9 percent annually on her investment in a tax-exempt IRA account. What will be the value of a one time $10,000 investment in 5 years? 10 years? 20 years?
There are no taxes to consider, so we can use the basic formula for the future value of $1, which is:
Future value of $1=$1*(1+interest rate)^Number of compounding periods
Thus, in 5 years the $10,000 will be worth:
Future value of $10,000=$10,000*(1.09)^5=$10,000*1.09*1.09*1.09*1.09*1.09=$10,000*1.538624=$15,386.24
This solution will illustrate how to compute the before- and after-tax values of a one-time investment earning 9 percent after 5, 10 and 20 years,
Managing Costs and Profitability
Congratulations! Your work on understanding and managing the costs and profitability of Claire's Antiques has resulted in record-breaking sales volume and profits. As a result, senior management is considering two new warehouse locations in order to serve its customers in the North and West more efficiently. Unfortunately, the company only has sufficient funds to invest into only one warehouse location at this time. Each warehouse will require that a new building be constructed. Claire's Antiques expects to use the warehouse for five (5) years before building a new production facility in that area. Senior management hired a consulting firm to research the potential warehouse locations. You were at a meeting with the researchers and they gave you the results of the research.
Create a power point presentation that you will make to management. Use the following assumptions:
Assume the risk-adjusted cost of capital is 10% and its tax rate is 40%. Compute the net present value (NPV) for each warehouse proposal. Include the cash flows from salvage value and the tax benefits of depreciation (assume 5-year straight-line). Incorporate the research data and graphs and charts into your presentation for support to your recommendation.
Include in your presentation recommendations on the desired warehouse location for senior management. Specify how your recommendation is affected by your assumptions for cost of capital and expected contribution margin (that is, perform a sensitivity analysis)?
The PowerPoint should include notes and graphs. Your cover and reference pages do not count towards the required deliverable length, and speaker notes of 200-250 words should be included with the presentation. Complete the calculations for cash flow and discounting in Excel.
New Warehouse Location North Warehouse West Warehouse
Estimated first year revenue increase $650,000 $900,000
Estimated annual revenue growth 7% 8%
Estimated contribution margin % 55% 45%
Marginal tax rate 40% 40%
Estimated annual fixed costs $100,000 $120,000
Investment in facility $1,500,000 $1,700,000
One-time advertising in year 0 $140,000 $150,000
Estimated salvage value in year 6 $125,000 $120,000
Discounting Rate 10%