ROI Analysis with Depreciation and Tax Considerations

A company is making consumer (high volume) and industrial (low volume) lines of microwave ovens using the same technology. The company decides to sell the industrial microwave line. Your company is considering buying the line for $500,000. Company depreciation method is straight-line, its tax rate is 20 percent, and marketing thinks it can sell 12 units per year at a profit of $10,000/unit for five years. Assume no book value after five years. Minimum starting ROI is 4%.

Perform economic analysis using the three methods for economic evaluation of projects:

Solution 1:

RF = Lifecycle Product Operating Profit / New Product Development Costs

RF = (_____________________________________)/ (______________) = ________________

Solution 2:

Payback Period = New Product Development Costs / Lifecycle Product Operating Profit per year

Payback Period = (__________________) / (______________________) = ____________________

Solution 3:

Straight-Line Depreciation = Value of the Asset ($) / Lifecycle of the Asset (Years)

Year End	Before Tax Cash Flow	Depreciation	Taxable Income	Taxes	After Tax Cash Flow
0
1
2
3
4
5

Taxable Income = Cash Flow (Operating Profit or Income) Depreciation

Taxes = Taxable Income * Current Level of Corporate Income Tax Rate

After Tax Income = Taxable Income Taxes

ROI Analysis:

i = 5%.... PV = _______________ + ___________________________ = ___________________

i = 6%.... PV = _______________ + __________________________ = ____________________

ROI returns a present value of zero (ie when PV of costs equals PV of revenue)

Here the answer is somewhere between 5% and 6%.

Interpolating: ____________ / (_____________ + ____________) = ____________________

Now, i = ____________