MINICASE

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 well-known onlion

marketing company drawing an annual salary of < 15 lakhs with normal annual increment of 8 percent

What is emboldening him to take the plunge is the fact that his wife is firmly e

nly 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 < 20 lakhs and furniture and fixtures costing < 30 lakhs. A one-time

non-refundable Government subsidy at 20 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 <40 lakhs from a bank for the project, at an interest rate of 9 percent,

repayable in four equal annual installments after an initial holiday period of 1 year,

On shifting to own office space, while no additional fixed assets would be needed, a one-

time relocation expense of < 2 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 < 2 lakhs, which would all be refunded in full at the end of 5 years. An amount of

10 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 < 1 lakh would have to be held on an ongoing basis

which might fetch a net salvage value of only 0.25 lakh after 5 years. An amount of < 1.5 lakhs would be

needed towards the cost of electricity and water, < 3 lakhs towards transportation expenses and

1 lakh towards miscellaneous expenses each year. For the rented premises, an interest free

refundable security deposit of < 2 lakhs would have to be kept with the landlord and an annual

rent of < 5 lakhs would have to be paid to him at the beginning of each year. There would in all

be 10 employees under him and their annual salary would total to < 50 lakhs with an average

annual increment of 8 percent. The revenues during the project life are estimated to be as follows:

in lakhs

Year 1

Year 2

Year 3

80

Year 5

100

Year 4

120

110

80

The depreciation rate on computer and accessories would be 60 percent and on furniture

and fixtures 10 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 33 percent. At the end

of 5 years the computers and accessories and furniture and fittings would together fetch a net

salvage value of < 25 lakhs. What is the IRR of the project? Is it financially worthwhile for Jacob?