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Markers Tattoo: Net Present Value

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Markers Tattoo studio is thinking about buying a new piece of laser therapy equipment. The cost of the equipment is $300,000 with an installation fee of 20,000. It is estimated Markers can make $98,000 annually with their new service to clients. The equipment would require an annual maintenance fee of $10,000. The equipment is expected to last 5 years. The terminal disposal value would be $20,000. Markers has a 25% income tax rate and calculates depreciation on a straight-line Basis. Is this a good investment for Markers who has a Required Rate of Return of 10%?

1. Determine the expected increase in annual net income from investing in the new equipment.
2. Calculate the accrual accounting rate of return based on average investment.
3. Summarize whether the new equipment is worth investing in from a net present value (NPV) standpoint.
4. Suppose that the tax authorities are willing to let Marker's depreciate the new equipment down to zero over its useful life.

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Solution Summary

Process mapped in Excel for original and change in depreciation.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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