Determine the expected increase in annual net income from

Reference no: EM133481343

Case Study: 4 pages not including cover page or reference page. Marker's Tattoo Studio wants to buy new laser therapy equipment. This new equipment would cost $300,000 to purchase and $20,000 to install. Marker's estimates that this new equipment would yield incremental margins of $98,000 annually due to new client services. It would require incremental cash maintenance costs of $10,000 annually. Marker's expects the life of this equipment to be 5 years. They estimate a terminal disposal value of $20,000.

Marker's has a 25% income tax rate and depreciates assets on a straight-line basis (to terminal value) for tax purposes. The required rate of return on investments is 10%.

Question 1: Determine the expected increase in annual net income from investing in the new equipment.

Question 2: Calculate the accrual accounting rate of return based on average investment.

Question 3: Summarize whether the new equipment is worth investing in from a net present value (NPV) standpoint.

Question 4: Suppose that the tax authorities are willing to let Marker's depreciate the new equipment down to zero over its useful life. If Marker's plans to liquidate the equipment in 5 years, should it take this option? Quantify the impact of this choice on the NPV of the new equipment.

Reference no: EM133481343

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