BUS 5111 - Financial Management – Written Assignment Unit 3 1

WE PROMOTE COMPANY CASE STUDY

BUS 5111 - Financial Management

Written Assignment Unit 3

University of the People

Instructor: Dr. Dinesh Tandon

 BUS 5111 - Financial Management – Written Assignment Unit 3 2

Introduction

Net Present Value (NPV) is a capital budgeting technique that is used to evaluate

the profitability of a potential investment. It takes into account the time value of money

by discounting future cash flows to their present value. The NPV of a project is

calculated by subtracting the initial investment from the present value of all future cash

flows (Sandy Kenrick, 2023)

Taxation and depreciation can have a significant impact on the NPV of a project.

Taxes reduce the amount of cash flow that a company receives from a project, while

depreciation reduces the company's taxable income (Brealey, Myers, & Allen, 2021). The

after-tax cash flows are calculated by subtracting the amount of taxes paid from the cash

flows that the company would receive if there were no taxes. Depreciation is a non-cash

expense that reduces a company's taxable income. It is calculated by spreading the cost of

an asset over its useful life. The tax shield from depreciation is calculated by multiplying

the amount of depreciation by the company's tax rate.

The formula for calculating NPV is as follows:

𝐶𝐶𝐶𝐶
NPV =∑𝑛𝑛𝑡𝑡=0 − 𝐶𝐶0
(1+𝑟𝑟)𝑡𝑡

NPV = Net Present Value

Ct = Cash flow at the time
r = Discount rate (the rate of return required for the investment)
n = Number of time periods
C0 Initial investment cost (at time t=0)
 BUS 5111 - Financial Management – Written Assignment Unit 3 3

Case Study

My lifelong friend and I are co-owners of We PROMOTE, WePROMOTE, a

promotional materials company, is considering a new project to manufacture a durable

and attractive smartphone case with the logo of a prominent local client. The case will be

given away at public relations events.

The cost of the equipment is $70,000 and will be incurred before any cash is received

by the project. The expected annual cash revenue of the project is $30,000, and the

expected annual cash outflows are $11,000, excluding depreciation. The tax rate is 30%,

and the equipment will be depreciated on a straight-line basis for its 5-year life. There

will be no salvage value after 5 years.

Calculations.

Year 0 1 2 3 4 5
Equipment Cost -$70,000 0,00
Annual Cash revenue $30,000 $30,000 $30,000 $30,00 $30,000
Annual cash outflows (Excluding
-$11,000 -$11,000 -$11,000 -$11,000 -$11,000
Depreciation)
Depreciation (Straight line) -$14,000 -$14,000 -$14,000 -$14,000 -$14,000
Net Profit Before Tax $19,000 $19,000 $19,000 $19,000 $19,000
Taxable Amount $5,000 $5,000 $5,000 $5,000 $5,000
Tax Expenses (Rate:30%) -$1,500 -$1,500 -$1,500 -$1,500 -$1,500
Net Profit after Tax $17,500 $17,500 $17,500 $17,500 $17,500
PV (Factor) at 6 % 1 0.9434 0.8900 0.8396 0.7921 0.7473
PV -$70,000 $16,509 $15,575 $14,693 $13,862 $13,077
NPV $3,717
 BUS 5111 - Financial Management – Written Assignment Unit 3 4

Narrative

As previously discussed, the project's financial evaluation starts with an initial

investment of $70,000 for the equipment, which is a critical cost that occurs before any

revenue is generated. Over the project's 5-year life, the expected annual cash revenue

from distributing smartphone cases with the client's logo amounts to $30,000. To operate

and support the project, annual cash outflows of $11,000, excluding depreciation, are

incurred. So, the profit net value before Tax / year = Annual Cash revenue- Annual cash

outflows (Excluding Depreciation) = $19,000 /year

Depreciation is applied on a straight-line basis, leading to an annual depreciation expense

of $14,000. This depreciation is a non-cash expense which does not affect the cash flow

but it reduces a company's taxable income and affects the taxable amount and tax

expenses, as a 30% tax rate is applied to the project's profits. After considering the tax

implications, the net profit after tax is calculated for each year. So, the taxable a mount/

year = Annual Cash revenue- Annual cash outflows (Excluding Depreciation)-

Depreciation (Straight line) = $5,000 based on that the tax will be= taxable a mount/ year

*30 %= -$1,500 /year and the Net Profit after Tax/ year = profit net value before Tax /

year - the taxable a mount/ year = $17,500/year.

To assess the project's financial viability, we employ a discount rate of 6% to determine

the Net Present Value (NPV). The NPV helps in understanding whether the project is

financially attractive. In this case, the NPV is calculated to be $3,717, indicating that the

project is expected to generate a positive value above the initial investment. Therefore,
 BUS 5111 - Financial Management – Written Assignment Unit 3 5

the project seems financially feasible when considering the 6% discount rate. The NPV

represents the net benefit or value that can be expected from the project over its 5-year

duration. The positive NPV suggests that the project is likely to be a financially sound

investment, making it a favorable choice for the company.

Conclusion

Based on the financial analysis, it is evident that the proposed project to manufacture

durable and attractive smartphone cases with a prominent local client's logo is financially

viable. The Net Present Value (NPV) of $3,717, when considering a 6% discount rate,

signifies that the project is expected to generate a positive value exceeding the initial

investment. This suggests that the project has the potential to provide a net benefit over

its 5-year duration.

Recommendation

Given the positive NPV and the financial feasibility of the project, it is recommended

that We PROMOTE pursue this business opportunity. The project aligns with the

company's expertise in promotional materials and offers the potential for revenue

generation through the distribution of smartphone cases at public relations events.

Moreover, the association with a prominent local client enhances the project's appeal.

However, it is essential to conduct a more comprehensive analysis, including market

research, cost control strategies, and risk assessment, before proceeding with the project.

Nevertheless, the initial financial assessment indicates that this venture holds promise and

should be explored further as a strategic business opportunity for We PROMOTE.

 BUS 5111 - Financial Management – Written Assignment Unit 3 6

References

Sandy Kenrick. (2023). How To Calculate NPV: Definition, Formulas and Examples.
Indeed.

https://www.indeed.com/career-advice/career-development/calculate-npv

Brealey, R. A., Myers, S. C., & Allen, F. (2021). Principles of corporate finance.
McGraw-Hill Education