You bought a survey device at $750,000 at beginning of year 1. You expect to use it to generate an annual revenue of $350,000 for year 1 and increase at 4% per year. The operating expenses will be $ 120,000 for year 1 and increase at 3% per year. At end of year 3, you can sell the device for $300,000 and close the business. Assuming you will have an income tax rate of 30% every year and a capital gain tax rate of 15% at year 3 and you will take depreciation charge every year based on the MACRS schedule as follows:
Year 1 20%
Year 2 32%
Year 3 19.2%
Part 1
Assuming all cash investment and using a MARR of 12%, what is the Net Present Value of this 3-year business and what is the IRR? Show the results as formatted below
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1
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2
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3
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Revenue
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Operating Expense
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EBITDA
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Depreciation Charge
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Taxable Income
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Tax @30% tax rate
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Net Income
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CFAT
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Also clearly show the calculations of each year's Depreciation Charges, Cash Flow After Tax at Year 3 for selling of the device and calculations of the present value and IRR, separately.
Part 2
Assuming you will obtain a bank loan of $450,000 at an interest rate of 6% per year. The loan requires interest payment only at end of each year and the loan principle is due at end of the 3rd year (like a bond arrangement). Everything else stays the same as Part 1. Re-calculate everything as you did in Part 1.
Based on the result of Part 2, make your recommendation as which way to go, Part 1 or Part 2, and explain how financial leverage works?