Financial Planning for Entrepreneurs
Essay by Shobnom Tanha • May 15, 2017 • Research Paper • 4,039 Words (17 Pages) • 1,363 Views
Assignment -1
Financial planning for entrepreneurs
(FIN 503)
Question 1
Question A
Depreciation Schedule
Year | Depreciation allowance | Depreciation expenses | Depreciation tax shield |
1 | 0.2 | 17000 | 6800 |
2 | 0.32 | 27200 | 10880 |
3 | 0.19 | 16150 | 6460 |
4 | 0.12 | 10200 | 4080 |
5 | 0.11 | 9350 | 3740 |
6 | 0.06 | 5100 | 2040 |
1 | 85000 | 34000 |
Total cost of SRC
= costs including taxes and delivery + other expense for installing the equipment
= $80,000 + $5,000 = $85,000.
The total depreciation allowances is100%.
Depreciation Expense = (Depreciation allowances x total cost of SRC)
For example, Depreciation Expense in year 1 = $85,000 x 20% = 17,000.
Tax rate is 40%. For example, depreciation tax shield in year 1 = 40% x $17,000 = $6,800.
(Tax rate x total cost of SRC) = 40% x $85,000 = $34,000.
Projected Cash flow
Year | Net cost | Depreciation tax sheild | After tax saving cost | Net cash flow after tax | PV cash flow |
0 | -80,000 | 15000 | -85000 | -85000 | |
1 | -5000 | 6800 | 15000 | 21800 | 19818 |
2 | 10880 | 15000 | 25880 | 21388 | |
3 | 6460 | 15000 | 21460 | 16123 | |
4 | 4080 | 15000 | 19080 | 13032 | |
5 | 3740 | 15000 | 18740 | 11636 | |
6 | 2040 | 15000 | 17040 | 9619 | |
7 | 15000 | 15000 | 7697 | ||
8 | 15000 | 15000 | 6998 |
The after tax cost savings
= (the before-tax operating costs) x (1 – Tax) = $25,000 x (1 – 40%) = $15,000.
Applying the formula to calculate PV.
[pic 1]
FV= Future value
r = rate of return
n = Number of periods
For example, PV Cash Flow in year 1 = (Net Cash Flow after tax) x 1/(1+10%)1= 19818
“Applying the formula to calculate NPV” (Capital Budgeting Techniques, 2010).
[pic 2]
NPV = 6,800(1 + 10%)−1 + 10,880(1 + 10%)−2 + 6,460(1 + 10%)−3 + 4,080(1 + 10%)-4
+ 3,740(1 + 10%)−5 + 2,040(1 + 10%)−6+ (15,000){1− (1+10%)-8}/10%- 85,000
= $21,311
The economic rationale behind the NPV
NPV is a capital planning technique for looking at the expenses and event of proposed speculations or tasks. To compute NPV, we subtract a venture's PV of expenses from its present estimation of advantages. NPV fundamentally looks to distinguish the most practical venture openings by contrasting the present estimation of future money streams of tasks. The reason behind the NPV strategy is its attention on the boost of riches for entrepreneurs or shareholders. The NPV strategy gives clear criteria to picking or dismissing speculation ventures. Ventures with positive NPVs fit the bill for choice on the grounds that their advantages, as far as target rates of profits surpass costs. Speculations yield zero NPV when they have approach advantages and expenses. This manages, organizations the adaptability to acknowledge or reject such speculations. Negative NPVs, then again, are misfortune making speculations that must evade totally. The NPV technique empowers organization to change in accordance with the difficulties of working with constrained money related assets. NPV can be utilized to rank totally unrelated or contending ventures to decide the ones that fall inside the planned furthest reaches of the organization. For instance, they substance may have a feasible venture that falls past its monetary capacities. Undertaking such a speculation would be purposeless in light of the fact that the organization will need adequate assets to bolster it. NPV rankings give instruments to identifying such inconsistencies. Moreover, the NPV is acquired by marking down future money streams, and the reducing procedure really intensifies the financing cost after some time. In this way, an expansion in the markdown rate has a substantially more prominent effect on an income.
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