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Case Study: WePromote Promotional Company

University of People (UoPeople).

BUS 5111 - 01 Financial Management - AY2024-T4

Dr. Dominic Isaac

Thursday, May 1, 2024

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Introduction

The case study examined WePromote as a company dealing in promotional materials

business. The business is co-owned. I will perform a final NPV calculations and

provide a narrative on the calculations. The initial investment on the fixed asset is

$70,000, the annual cash revenue is $30,000 and the expense is put at $11,000 at a

discount rate of 6% and the project will last for 5years.

Approach to the problem would analyze my net cash inflow which considers

operating expenses, depreciation, discount rate and a 5years that will be subtracted

from the initial cash flow to be able to calculate the NPV. My conclusion would be

made based on my NPV calculation to be able to deduce if the project is financially

viable.

Calculation of the Net Cash Flow using Table Presentation

Year Initial Revenue Expenses Depreciati Discount Present Net

Investment without on Rate (6%) Value Present

depreciation Value

0 ($70,000) $0 $0 ($70,000)

1 $30,000 $11,000 $14,000 0.943396 $16,509 $16,509

2 $30,000 $11,000 $14,000 0.889996 $15,575 $15,575

3 $30,000 $11,000 $14,000 0.839619 $14,693 $14,693

4 $30,000 $11,000 $14,000 0.792094 $13,862 $13,862

5 $30,000 $11,000 $14,000 0.747258 $13,077 $13,077

$73,716 $3,716
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Formula for calculating the NPV

Net cash flow = Profit after tax + Depreciation expense

Profit after tax = Profit before tax -Tax expense

= $30,000 - $11,000 = $19,000

Profit before tax = Cash inflow - Total cost

Tax = Given at 30% X $5,000 = $1,500

Total cost = Cash outflow + Depreciation expenses

Depreciation expenses = $70,000 /5years = $14,000

After tax cash flow = $3,500

After tax cash inflow = $5,000 - $3,500 = $1,500

Net cash flow after tax = $14,000 + $3,500 = $17,500

NPV = EPV of net cash flows - Initial investment (Hill, 2014).

$17,500/(1 +0.06) + $17,500/(1+ 0.06)2 + $17,500/(1+ 0.06)3 + $17,000/( 1+0.06)4 +

$17,000/(1+0.06)5

= $73,716 - $70,000 = $3,716

How depreciation and its tax consequences affect the cash flow of the project

Expenses Annual

Initial without Depreciation expenses depreciation After tax Net

Year Investment Revenue depreciation ($70,000/5) cash saving Cash Flow

0 ($70,000) $0 $0

1 $30,000 $11,000 $14,000 $4,200 $17,500

2 $30,000 $11,000 $14,000 $4,200 $17,500

 Expenses Annual

Initial without Depreciation expenses depreciation After tax Net

Year Investment Revenue depreciation ($70,000/5) cash saving Cash Flow

3 $30,000 $11,000 $14,000 $4,200 $17,500

4 $30,000 $11,000 $14,000 $4,200 $17,500

5 $30,000 $11,000 $14,000 $4,200 $17,500

The amount you deduct on your tax return is your depreciation expense. You record it

as a debit because its an expense (Warnes, 2022). In this case, there is tax

consequences on the depreciation which is recorded as $14,000 annually and the

annual cash saved on depreciation is $4,200 which affected the amount that is taxed

which is $5,000. In the latter part, the depreciation expense which is $14,000 is added

to the net income which gives us $17,500 as our net cash flow for each year.

Conclusion and Recommendation

As the project has a positive net present value (NPV) of about $3,716 it is financially

feasible. It means that the projected returns on the project is as high as the initial

outlay and the cost of capital. A project or investments rate of return will exceed the

discount rate if its net present value (NPV) is positive (Fernando,2024). It is therefore

advised to pursue this business opportunity further. Considering the NPV analysis and

financial principles WePROMOTE company does seem capable and have the

financial means to proceed with the smartphone case manufacturing project.

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References

Fernando, J (2024). Net present value (NPV): what it means and steps to calculate it.

Retrieved from investopedia: https://www.investopedia.com/terms/n/npv.asp

Hill, R. (2014). Strategic financial management. Bookboon.com

Warnes, B (2022). What is depreciation? and how do you calculate it?

https://www.bench.co/blog/tax-tips/depreciation