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Project choice, taxes. Klein Dermatology is contemplating purchasing new laser therapy equipment. This new equipment would cost $300,000 to purchase and $20,000 for installation. Klein estimates that this new equipment would yield incremental margins of $98,000 annually due to new client services but would require incremental cash maintenance costs of $10,000 annually. Klein expects the life of this equipment to be 5 years and estimates a terminal disposal value of $20,000.
Klein has a 25% income tax rate and
- 1. What is the expected increase in annual net income from investing in the improvements?
Required
- 2. Calculate the accrual accounting rate of return based on average investment.
- 3. Is the project worth investing in from an
NPV standpoint? - 4. Suppose the tax authorities are willing to let Klein depreciate the project down to zero over its useful life. If Klein plans to liquidate the project in 5 years, should it take this option? Quantify the impact of this choice on the NPV of the project.
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