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Investment Analysis of Unique Smartphone Case Project in A WePROMOTE Company

Case Study

Business Administration, The University of the People

BUS 5111: Financial Management

Dr. Dominic Isaac

May 01, 2024

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Introduction

This paper addresses a strategic business decision for WePROMOTE Company, co-owned by

the author and a partner, focusing on the potential project of manufacturing a unique smartphone

case. The case will be durable, visually appealing, and customizable with a client logo for

promotional public events distribution. This case will employ the Net Present Value (NPV) tool

to evaluate investment opportunities and determine the financial viability of this project. This

involves evaluating the project's expected cash flows, both inflows and outflows, considering the

equipment's cost, operational expenses, depreciation, tax implications, and the crucial role of the

chosen discount rate over the project's life span. The aim is to determine whether the project's

future cash flows, discounted back to their present value, exceed the initial investment, indicating

a profitable opportunity.

The NPV method, a highly efficient tool, evaluates the profitability of investment projects by

comparing the present value of all cash flows to the initial investment. A favorable NPV signifies

the project's potential profitability, whereas an unfavorable NPV implies a possible loss. This

methodology, widely acknowledged for its efficiency in capital budgeting and investment

decision-making, instills confidence in the analysis process (Brealey et al., 2020).

30%, applied to the taxable income. The annual net cash flow is calculated by adjusting the pre-

tax cash flow for taxes. A discount rate of 6% is used to calculate the present value of future cash

flows.

- Depreciation and Tax

We note that Depreciation reduces taxable income, hence the actual tax payable. This reduction

in tax liability due to depreciation is known as the 'depreciation tax shield, a concept that plays a

significant role in our financial calculations.

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Depreciation Tax Shield: $14,000 * 30% = $4,200 annually

- Net Operating Cash Flows

When calculating net operating cash flows, we must consider revenues, operating expenses,

taxes, and depreciation.

- Operating Income Before Taxes: To calculate the operating income before taxes, we

need to subtract the operating expenses from the operating revenue.

$30,000 (revenue) - $11,000 (expenses) = $19,000

Therefore, the operating income before taxes is $19,000.

- Taxable income: To find taxable income, we must deduct any allowable deductions

from the operating income before taxes, such as depreciation expense.

Taxable income = Operating income before taxes – Depreciation expenses

= $19,000 - $14,000 = $5,000

Therefore, the taxable income after accounting depreciation is $5,000.

- Tax: To calculate the tax paid, we must multiply the taxable income by tax rate.

Taxes = Taxable income * Tax rate

= $5,000 * 30% = $1,500

Therefore, the tax is $1,500.

- Net Operating Income After Taxes: to find the net operating income after taxes, we

subtract the tax from the operating income before taxes.

Net Operating Income After Taxes = Operating income before taxes – Tax

= $19,000 - $1,500 = $17,500

Therefore, the net operating income after taxes is $17,500

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- Net Cash Flow After Taxes and Depreciation: To calculate net cash flow after taxes

and depreciation, we subtract the tax from the net operating income after taxes and then

add the depreciation expense; we subtract the total cash outflows from the total cash

inflows.

Net Cash flow = Net Operating Income After Taxes + Depreciation Expense

= $17,500 + $14,000 = $31,500

Therefore, the net cash flow after taxes and depreciation is $31,500

Calculation Details:

• Depreciation: $70,000 / 5 = $14,000 per year.

• Taxable Income: $19,000 (pre-tax cash flow) - $14,000 (depreciation) = $5,000.

• Taxes: 30% of $5,000 = $1,500.

• Net Cash Flow: Pre-tax cash flow - taxes = $17,500.

NPV Calculation:
𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑡
Using the formula NPV = ∑5𝑡=1 (1+𝑟)𝑡

Where: r = discount rate (6% or 0.06)

t is the year (from 1 to 5)

Net cash flow is $31,500 for each year

Assuming the project lasts for five years, the cash flow calculations for each year are as follows:

Year Cash Flow in $ Discount Factor @ 6% Present Value in $

0 -70,000 1.000 -70,000

1 31,500 1 / (1.06) ^1 = 0.9434 31,500 * 0.9434 = 29,716.981

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2 31,500 1 / (1.06) ^2 = 0.8899 31,500 * 0.8899 = 28,034.888

3 31,500 1 / (1.06) ^3 = 0.8396 31,500 * 0.8396 = 26,448.014

4 31,500 1 / (1.06) ^4 = 0.7921 31,500 * 0.7921 = 24,950.950

5 31,500 1 / (1.06) ^5 = 0.7473 31,500 * 0.7473 = 23,538.633

Total PV $62,689.47

Total NPV calculation is the sum of the present value from 0 to 5

Total Present Value of Cash Flows (Years 1 to 5):

29,716.981+ 28,034.888+ 26,448.014 + 24,950.95 + 23,538.633= $132,843.234

Net Present Value (NPV):

NPV = Total PV of Cash Flows – Initial Investment

= -70,000 + 132,843.234 = $62,689.47

Conclusion:

If the calculated NPV is positive, the project is expected to generate a return above the cost of

capital (6% in this case), making it a potentially profitable investment worth pursuing.

Conversely, a negative NPV would suggest the project is likely to underperform relative to the

firm's cost of capital, indicating it might not be a worthwhile investment.

Thus, WePROMOTE's NPV is approximately $62,843.23; the positive NPV suggests that the

project is financially viable, generating a positive net value when discounted at the given rate.
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References

- Bhimani, A., & Horngren, C. T. (2008). Management and cost accounting. Harlow:

Financial Times/Prentice Hall.

- Cengage.Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Accounting principles.

Hoboken, NJ: John Wiley & Sons.

- Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance.

McGraw-Hill
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The Initial project investment requires an upfront investment of $70,000 for equipment. The
Annual Cash Flow expected from the project's annual revenue is $30,000, with annual operating
costs of $11,000, leading to a pre-tax cash flow of $19,000. The equipment, with no salvage
value at the end of its 5-year life, is depreciated on a straight-line basis, resulting in an annual
depreciation expense of $14,000 ($70,000/5 years). The project's taxable income annually is the
pre-tax cash flow minus depreciation, which affects the project's tax liability. The tax rate is
Conclusion
The tailored recruitment strategy proposed herein provides Red Lobster with a robust framework
to attract and select qualified candidates in harmony with the restaurant's mission and values.
Red Lobster can enhance its brand identity and operational success by emphasizing the creation
of dynamic, values-oriented job descriptions and leveraging both traditional and innovative
recruitment avenues. The strategies discussed aim to reach a diverse and talented candidate pool,
integrating techniques that cater to passive candidates and cultural inclusivity. Implementing
these recommendations will facilitate the development of a workforce that is engaged, motivated,
and capable of propelling Red Lobster toward its strategic goals. Ultimately, this targeted
recruitment approach will play a crucial role in shaping the future of Red Lobster, ensuring that
each restaurant not only fulfills but surpasses the expectations of its customers and maintains its
place as a leader in the seafood dining experience.

References:

- Heathfield, S. M. (2020). How to Write Effective Job Descriptions.

- Breaugh, J. A. (2018). Employee recruitment. Annual Review of Organizational
Psychology and Organizational Behavior, 5, 389-411.
- Society for Human Resource Management. (2020). How to write a job description.
Retrieved from https://www.shrm.org/ResourcesAndTools/tools-and-samples/how-to-
guides/Pages/default.aspx
- U.S. Bureau of Labor Statistics. (2021). Occupational Outlook Handbook. Retrieved
from https://www.bls.gov/ooh/
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