The Directors of the Ritchiemond Football Club (a tax paying entity) are very
concerned about the club’s lack of success over recent years. They are seriously
considering the purchase of 20 new football robots that are being manufactured in
Tegucigalpa.
These robots will replace 20 of the players the club fields each week. The robots cost
$15,000 each, with an additional charge for painting in club colours and transporting
them to the club’s home ground. This amounts to $2,500 per robot. The robots will be
depreciated on a straight line basis at twenty percent per annum.
The directors believe the robots, after being programmed to mark, handball and kick
with both feet, can win most of their games and so generate an additional $100,000
in gate receipts each year. Not having to pay the current list of players will save the
club an extra $30,000 a year.
The robots will have a playing career of five years, after which time their central
processing units can no longer think or see. They will then be sold off (for a total of
$20,000) to a company that paints them white, puts whistles in their mouths, and
uses them as umpires.
Ritchiemond’s required rate of return is 12 percent and the corporate tax rate is 30%.
Calculate:
a) Net Present Value (NPV) $61679
b) Internal Rate of Return (IRR) 18.79%
a) Payback Period 3.125 year
e) Present Value Index 1.176
Year 0 1 2 3 4 5
STEP 1 – Calculate Taxable Income
Increased Revenue 100,000 100,000 100,000 100,000 100,000
Cost savings 30,000 30,000 30,000 30,000 30,000
Depreciation -70,000 -70,000 -70,000 -70,000 -70,000
Gain/Loss on Sale for new machine 20,000
Taxable income 0 60,000 60,000 60,000 60,000 80,000
Tax @ 30% 0 -18,000 -18,000 -18,000 -18,000 -24,000
STEP 2 – Include All Cash Flows
Tax refund/paid 0 -18,000 -18,000 -18,000 -18,000 -24,000
Initial Cost -350,000
Increased Revenue 100,000 100,000 100,000 100,000 100,000
Cost savings 30,000 30,000 30,000 30,000 30,000
Salvage value of machine 20,000
Net Cash Flow -350,000 112,000 112,000 112,000 112,000 126,000
PVCF @ 12% -350000 93333 77778 64815 54012 50637