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    Tax Benefit for Proposal

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    Some notes/clarifications to assist in doing the evaluation/analysis portion of the assignment:

    You may do the analysis using paper and pencil, but use of Excel would prove beneficial.
    You may want to set up a schedule in which column A is the Description of the specific cash flow being considered, column B is year 0 (proposal introduction, i.e. "start-up"), columns C through G are the analysis years 1 through 5, and column H is year 6 (proposal completion, i.e. "shut-down").
    Column A should identify each of the elements that must be analyzed when considering the proposal's cash flows. Be sure to list each inflow and outflow.
    Sales Revenue: Estimated annual revenue is given for year one, and is affected by an annual rate of revenue growth.
    Variable Expenses: The amount of variable expenses in implied by the contribution margin % that is given.
    Fixed Costs: By definition, fixed costs remain fixed in each of the analysis years.
    Tax Benefits: annual tax benefits are tied to an estimated 40% tax rate. Therefore, proposal 1 depreciation expense of $220,000/year means a tax savings impact on the analysis of $88,000/year. Likewise, proposal 2 depreciation expense of $175,000/year means a tax savings impact on the analysis of $70,000/year.
    Present Value: The annual cash inflows and outflows must be totaled for each year (0-6); the present value of that year's annual cash flow must be calculated for each of the years.
    Project NPV: The sum of each of these present value calculations is the project Net Present Value.
    Sensitivity Analysis: Bracketing the 12% cost of capital plus or minus a few per cent will create a range, identifying the affect that 10% and 15% (for example) would have on the NPV. Likewise, bracketing the year one revenue number plus or minus $100,000 will create a range, identifying the sensitivity that more or less contribution margin has on the NPV.

    Here's how to prepare an analysis and calculate NPV (example = Proposal One):

    Step 1 of 3: Create analysis schedule (organize schedule to include eight columns):

    Place column headings as follows:

    Description Yr0(start-up) Yr1 Yr2 Yr3 Yr4 Yr5 Yr6(shut-down)

    Revenue 0 600 636 tbd tbd tbd 0

    (note: we are told that there will be 6% annual growth).

    Variable Exp 0 -360 -381 tbd tbd tbd 0

    (note: we are told that contribution margin is 40% of sales, therefore variable exp equals 60% of sales)

    _____________________________________________________________________

    Cont Margin 0 240 254 tbd tbd tbd 0

    Tax Benefits 0 88 88 88 88 88 0

    Fixed Costs 0 -120 -120 -120 -120 -120 0

    Investment -1,500 0 0 0 0 0 0

    Advertising -140 0 0 0 0 0 0

    Inventory -150 0 0 0 0 0 0

    Salvage 0 0 0 0 0 0 400

    Invent Recov 0 0 0 0 0 0 150

    ______________________________________________________________________

    Sum -1,790 208 222 tbd tbd tbd 550,000

    Step 2 of 3: Calculate PV for each annual sum (using factor table on p. 484):

    PV Yr0 = $-1,790,000

    PV Yr1 = $185,723 (i.e. $208,000 x .8929 = $185,723) (see p.484 for reqd factors)

    PV Yr2 = $177,297 (i.e. $222,400 x .7972 = $177,297)

    PV Yr3 = must be calculated

    PV Yr4 = must be calculated

    PV Yr5 = must be calculated

    PV Yr6 = $278,630 (i.e. $550,000 x .5066 = $278,630)

    Step 3 of 3: Sum of all (7) PV's noting positive and negative values = NPV

    Here's how to do the tax benefit calculation (example = Proposal One):

    1. Calculate the Net Investment = $1,500,000 less $400,000 salvage = $1,100,000

    2. Then, calculate Annual Depreciation = $1,100,000 Net Investment above divided by 5 years = $220,000

    3. Finally, calculate Annual Tax Benefit = $220,000 Annual Depr times 40% tax rate = $88,000

    Of course, you will need to calculate the Tax Benefit for Proposal Two using the same steps, different numbers

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    https://brainmass.com/economics/cost-benefit-analysis/tax-benefit-for-proposal-71958

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    Some notes/clarifications to assist in doing the evaluation/analysis portion of the assignment:

    You may do the analysis using paper and pencil, but use of Excel would prove beneficial.
    You may want to set up a schedule in which column A is the Description of the specific cash flow being considered, column B is year 0 (proposal introduction, i.e. "start-up"), columns C through G are the analysis years 1 through 5, and column H is year 6 (proposal completion, i.e. "shut-down").
    Column A should identify each of the elements that must be analyzed when considering the proposal's cash flows. Be sure to list each inflow and outflow.
    Sales Revenue: Estimated annual revenue is given for year one, and is affected by an annual rate of revenue growth.
    Variable Expenses: The amount of variable expenses in implied by the contribution margin % that is given.
    Fixed Costs: By definition, fixed costs remain fixed in each of the analysis years.
    Tax Benefits: annual tax benefits are tied to an estimated 40% tax rate. Therefore, proposal 1 depreciation expense of $220,000/year means a tax savings impact on the analysis of $88,000/year. Likewise, proposal 2 depreciation expense of $175,000/year means a tax ...

    Solution Summary

    This provides the steps to calculate the Tax Benefit for Proposal

    $2.19