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For the answer given above, revenue values are not correcty taken, please recheck The introduction of GST has thrown open a huge opportunity for the
For the answer given above, revenue values are not correcty taken, please recheck
The introduction of GST has thrown open a huge opportunity for the tax consultancy business and
Jacob Kurian is one of those professionals actively considering entering that field on his own. For
that he will have to resign the current job of working as a product manager in a wellknown online
marketing company drawing an annual salary of lakhs with normal annual increment of percent.
What is emboldening him to take the plunge is the fact that his wife is firmly employed as a project
manager in an MNC drawing a high salary more than him! and the couple is yet to raise a family.
His plan is to start a proprietary firm styled Taxperts. Though he owns an office space in an old
commercial complex, the lease on it would be expiring only in two years. However, as a similar sized
space adjacent to it is currently vacant, he plans to take that on rent to start with and eventually shift
to own place once that becomes vacant. The fixed assets for the project would consist of computers
and accessories costing lakhs and furniture and fixtures costing lakhs. A onetime
nonrefundable Government subsidy at percent of the cost of fixed assets would be
available at the beginning of the project. Besides, the government would also arrange
a term loan of lakhs from a bank for the project, at an interest rate of percent,
repayable in four equal annual installments after an initial holiday period of year.
On shifting to own office space, while no additional fixed assets would be needed, a one
time relocation expense of lakhs would have to be incurred. At the commencement of
business, the firm would have to make some advance payments and keep deposits with various
agencies totaling to lakhs, which would all be refunded in full at the end of years. An amount of
lakhs would have to be held ready at the start of the project in the firm's checking account to meet
employee payments as it would take a couple of months for the revenue stream to set in Various
stationery and other consumables totaling to lakh would have to be held on an ongoing basis
which might fetch a net salvage value of only lakh after years. An amount of lakhs would be
needed towards the cost of electricity and water, lakhs towards transportation expenses and
lakh towards miscellaneous expenses each year. For the rented premises, an interest free
refundable security deposit of lakhs would have to be kept with the landlord and an annual
rent of lakhs would have to be paid to him at the beginning of each year. There would in all
be employees under him and their annual salary would total to lakhs with an average
annual increment of percent. The revenues during the project life are estimated to be as follows:
The depreciation rate on computer and accessories would be percent and on furniture
and fixtures percent under the WDV method. The rented office space is fully depreciated.
Jacob has other means of income and his effective marginal tax rate is percent. At the end
of years the computers and accessories and furniture and fittings would together fetch a net
salvage value of lakhs. What is the IRR of the project? Is it financially worthwhile for Jacob?
Answer IRR
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