Purchase Solution

Tax Benefit for Proposal

Not what you're looking for?

Ask Custom Question

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

Purchase this Solution

Solution Summary

This provides the steps to calculate the Tax Benefit for Proposal

Solution Preview

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 ...

Purchase this Solution


Free BrainMass Quizzes
Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.