Unit 1 - Individual project

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Colorado Technical University *

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2304A-02

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Accounting

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Jan 9, 2024

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docx

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1 Unit 1 IP Antonio Sosa Colorado Technical University Optimizing Marker’s Tattoo Studio's Financial Strategy through Equipment Investment ACCT 615 11/18/2023
2 Unit 1 IP Introduction At this juncture, Marker's Tattoo Studio is considering investing $300,000 in new laser treatment equipment, plus an additional $20,000 for installation. It is projected that this expenditure will result in additional yearly margins of $98,000, somewhat offsetting the $10,000 increase in cash maintenance expenses. With a five-year usable life and a $20,000 projected terminal disposal value, the equipment promises to both broaden Marker's service offerings and draw in new customers looking for state-of-the-art tattoo treatments. Expected Increase in Annual Net Income The projected increase in revenue and the related cash maintenance expenditures account for the majority of the investment's additional yearly net income growth. The increased income from the launch of new client services made possible by the new equipment is represented by the incremental revenue, which is expected to be $98,000. This number represents the favorable financial effect we expect as a result of higher client involvement and greater service capacity (Datar & Rajan, 2020). Taking into consideration the $10,000 yearly incremental cash maintenance expenditures, we are basically accounting for the extra costs related to maintaining the new equipment. It's critical to understand that these expenses are balanced by the significant revenue received, which has a net positive effect on our income statement. Let's put it into perspective. The calculation of incremental net income is a straightforward subtraction of incremental cash maintenance costs from incremental revenue: Incremental Net Income = Incremental Revenue−Incremental Cash Maintenance Costs. Substituting the values, we find: Incremental Net Income = $98,000 + $10,000 = $108,000. Therefore, the expected increase in annual net income from investing in the
3 Unit 1 IP new equipment is a substantial $108,000. This figure encapsulates the positive financial impact that this strategic investment is poised to deliver to Marker’s Tattoo Studio. This increase in net income is more than just a number; it's a real improvement to our long-term viability and financial health. It emphasizes how this investment has the potential to greatly increase our total profitability. As we contemplate the strategic ramifications of this choice, let us not lose sight of the constructive path our studio may take by incorporating this state-of-the-art equipment. Accrual Accounting Rate of Return In regard to accrual accounting rate of return (AARR) associated with the potential investment in new laser therapy equipment. The AARR is a critical metric that gauges the percentage return on the average investment, providing a comprehensive view of the financial performance from an accrual accounting perspective. In our scenario, the AARR is approximately 32.67%. This number is obtained by dividing the average yearly accounting profit by the average investment. These two factors are crucial in determining if the planned equipment purchase is financially feasible. The anticipated yearly rise in profit is represented by the average annual accounting profit, which is computed as half of the additional margins at $98,000. Simultaneously, the average investment is $150,000, which is calculated as half of the net investment expenditure (which considers the cost of equipment, installation fees, and terminal disposal value). The estimated yearly return Marker's Tattoo Studio may receive on its typical investment is indicated by the resultant AARR of 32.67%. This metric serves as a valuable tool for decision-makers, offering a nuanced perspective on the potential profitability of the investment. As we explore avenues for strategic growth, the AARR provides critical financial
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