should jo invest show calculations marcs depreciasion write down any assuption f
ID: 2786182 • Letter: S
Question
should jo invest
show calculations
marcs depreciasion
write down any assuption
follow this templete
Jo Brown’s nursery operation has grown from a small herb plot into a thriving nursery business. There are 10 full-time employees and 20 seasonal (part-time) employees. For the last three years taxable income for Brown’s Nursery has been steady at $350,000 per year. While Jo is pleased with the current success of the nursery, she is considering a new contract to supply a local grocery chain with fresh herbs year round. The grocery chain’s current supplier is retiring in a year and is planning to sell his business to one of the other grocery chains he also supplies. Rather than assigning a large portion of her current capacity to this contract, she is considering expanding production. Jo has been offered a 5-year contract, starting in 1 year. To service this new contract without reducing current operations requires purchasing an adjacent piece of land and constructing additional greenhouse space. The property can be purchased for $200,000. The most economical solution to the greenhouse addition is to construct two modular greenhouses for $70,000 each. The modular greenhouses have a useful life of 12 years and a $5000 salvage value. Startup expenses are expected to be $22,500. The purchase of the land, construction of the greenhouses, and startup are projected to require one year. Incremental working capital for this project is $90,000 beginning with startup. Sales from the contract are forecast at $380,000 each year. Variable costs are estimated at $250,000 the first year, and Jo believes they will decrease at the rate of $5000 per year, as they become expert in growing the new items in the new greenhouses.
Case 36 Brown’s Nursery Part A
167
Incremental variable overhead for the new space is expected to be $30,000 per year but when the total overhead is re-allocated (based on square feet under glass) the new production will be charged $45,000 per year. Upon completion of the 5-year contract, Jo believes she can either obtain another contract from this customer, obtain a similar contract from another grocery chain, use the project’s assets to meet increased demand for herbs from current customers of the original operation, or dispose of the project’s assets. She believes the land can be sold for what was paid for it and each greenhouse is expected to have a market value of $40,000 at the end of the 5-year contract. This decision will be made early enough in the fifth year of the contract to dispose of the project’s assets in that year. The state tax rate is 11%. Jo uses an after-tax MARR of 12%.
Explanation / Answer
Year of Operation -1 0 1 2 3 4 5 Total Years 0 1 2 3 4 5 6 Taxable Income 84,250 89,250 94,250 99,250 1,04,250 Income Tax 11% 9,268 9,818 10,368 10,918 11,468 Net income 74,983 79,433 83,883 88,333 92,783 Cash Flow Statement Operating Activities Net Income 74,983 79,433 83,883 88,333 92,783 Depreciation+startupexp 15,750 15,750 15,750 15,750 15,750 Investment Activities Initial Investment Items (3,40,000) Salvage Value 80,000 Gains/(Loss) Tax (413) Fund for startup exp (22,500) Working Capital (90,000) 90,000 Financing Activities Borrowed Funds Principal Repayment Net Cash Flow (3,40,000) (1,12,500) 2,59,233 2,73,683 2,88,133 3,02,583 4,86,620 Discount Factor 12% 1 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 Present value (3,40,000) (1,00,446) 2,06,659 1,94,802 1,83,113 1,71,693 2,46,537 Net Present Value 5,62,357 As NPV 562,357 which is greater than zero So Project is acceptable Calculation of Net Income Sales 3,80,000 3,80,000 3,80,000 3,80,000 3,80,000 Variable Cost 2,50,000 2,45,000 2,40,000 2,35,000 2,30,000 Incremental Variable cost 30,000 30,000 30,000 30,000 30,000 Start up expenses 4,500 4,500 4,500 4,500 4,500 Depreciation 11,250 11,250 11,250 11,250 11,250 Net Taxable Income 84,250 89,250 94,250 99,250 1,04,250 Working Capital 90,000 Startup exp 22,500 Purchase of Land 2,00,000 Green House 1,40,000 at period-1 from statrtup 3,40,000 1,12,500 Depn 11250 =(140000-5000)/12 Start up expenses is deductible expenses for five years on equal basis at rate 4,500 yearly Working Capital will be released after five years Calculation of Gain/(Loss) Purchase cost of Green house 1,40,000 Depn 56,250 11250*5=56250 83,750 Less: Sales value 80,000 Loss 3,750 Tax saving on loss 413 Net Inflow 79,588 80000-413
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