Unit 1 - Individual project

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Colorado Technical University *

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Jan 9, 2024

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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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4 Unit 1 IP insights that can guide Marker’s in making informed and forward-thinking decisions (Datar & Rajan, 2020). NPV At this critical moment, Marker's Tattoo Studio is considering purchasing new laser therapy equipment. The choice to invest involves several considerations, and one important statistic to determine the endeavor's financial sustainability is its net present value, or NPV. The first NPV analysis produced a positive value of about $44,782.40 when it considered a needed rate of return of 10% and a conventional straight-line depreciation for tax reasons. This implies that the investment seems good financially and can yield positive returns from a conventional perspective (Datar & Rajan, 2020). However, when a different depreciation technique is considered, the situation changes. Marker's stands to gain from enhanced tax shielding by depreciating the equipment down to zero throughout its useful life, which will improve the net present value (NPV). With this technique, the NPV is computed and comes out to about $146,103.73, suggesting a much better financial prognosis. This significant increase emphasizes the need of sound financial planning, and the possible advantage of matching depreciation plans to tax laws. The positive NPV in both scenarios suggests that the investment in new laser therapy equipment holds merit. The choice of depreciation strategy, however, becomes a critical factor in optimizing financial returns. The alternative depreciation strategy, which aligns with tax regulations, not only enhances the NPV but also positions Marker’s for more favorable financial outcomes over the investment's lifespan. In conclusion, the NPV analysis clearly indicates that the new equipment is financially worthwhile. The investment has the potential to yield returns greater than the initial investment cost, as indicated by the positive net present value (NPV) numbers. Marker’s Tattoo Studio must

5 Unit 1 IP give considerable thought to how the selected depreciation plan will affect the net present value and overall financial results. This choice involves more than just financial data; it also takes strategic financial planning into account, which has a big influence on the long-term viability and profitability of Marker's Tattoo Studio. To optimize the possible advantages of this calculated investment, it is advised that Marker's prioritize going forwards making financial decisions in compliance with tax laws. Liquidating the Equipment in 5 Years There is a decision regarding the depreciation strategy for its prospective laser therapy equipment investment. Suppose tax authorities permit Marker’s to depreciate the new equipment down to zero over its useful life, and the studio plans to liquidate the equipment in 5 years. In that case, the financial landscape undergoes a significant transformation. This alternative depreciation strategy allows Marker’s to fully capitalize on tax benefits, potentially shaping the Net Present Value (NPV) in a more favorable light. After accounting for this depreciation strategy and the five-year equipment disposal plan, the NPV was estimated to be around $146,103.73. Compared to the original NPV computation, which used conventional straight-line depreciation for tax purposes, this indicates a significant rise. The increased net present value (NPV) highlights the benefits of matching the depreciation plan to tax laws. By maximizing the tax shield against depreciation, this decision improves the investment's financial picture. It seems like a wise financial move to dispose the new equipment after five years and depreciate it to zero throughout its useful life. This strategic decision not only aligns Marker's with solid financial procedures but also boosts the studio's prospective profitability, as indicated by the NPV enhancement of about $146,103.73. It showcases the studio's skillful handling of tax

6 Unit 1 IP laws to maximize returns on investment. This alternative depreciation method shows promise as a useful tool for improving the financial performance of the laser therapy equipment investment as Marker's Tattoo Studio moves ahead. Conclusion In conclusion, Marker's Tattoo Studio is poised to make a tactically beneficial investment in laser therapy equipment. When combined with a five-year liquidation schedule and the opportunity to depreciate the equipment to zero throughout its useful life, the Net Present Value (NPV) is greatly increased. This alternate depreciation plan shows potential to improve the studio's financial performance with a revised NPV of about $146,103.73. It is recommended that the leadership give this strategy some thought, matching financial choices to tax laws for optimal advantage. In addition to offering the prospect of more revenue, this calculated action highlights Marker's dedication to prudent financial management.

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7 Unit 1 IP References Datar, S. M., & Rajan, M. V. (2020). Horngren's Cost Accounting (17th ed.). Pearson Education (US). https://coloradotech.vitalsource.com/books/9780135632765