Solution
(Say) You are earning a Gross Profit (Total Revenue - Cost of Goods Sold) is $ 100,000 and it remains stable over the 5 years.
Year | 1 | 2 | 3 | 4 | 5 |
Tax - Without Cashier (@35%) | $ 35,000 | $ 35,000 | $ 35,000 | $ 35,000 | $ 35,000 |
Tax - With Cashier (@35%) | $ 22,750 | $ 22,750 | $ 22,750 | $ 22,750 | $ 22,750 |
Tax - With Machine (@35%) | $ 21,000 | $ 21,000 | $ 21,000 | $35,000 | $35,000 |
Benefit in terms of Tax | $ 1,750 | $ 1,750 | $ 1,750 | - $12,250 | -$12,250 |
As we can see,by using the automated kiosk,the benefit in the form of taxes @ $1750 is reaped by the business in the initial 3 years when the depreciation is @ 40,000 per year ($120,000 / 3 years) since it can be depreciated only over the 3 years.But since it can be used over a total of 5 years,eventhough the tax paid in this option is additonal $ 12,250 per year but the benefit of not employing the cahier is evident.
In the year 4 and Year 5 , the company (need not make any investment but can reap the benefit equivalent to that of having the cashier.
Gross profit = $ 100,000
Tax = $35,000
After Tax CF = $(100,000 - 35,000) i.e., $65,000
In case they are opted for the 1 st option of using a cashier,in the year 4 and year 5 they would have have:
After Tax CF = $ ( 100,000 - 35,000) * (1-0.35) i.e., $42,250
So now calculating the after tax CF benfits in the year 1 to 3 (when company opted for automated kiosk)
is [ ((100,000 - 35,000) * (1-0.35)) - ((100,000 - 40,000) * (1 - 0.35))]
$3250 per year
Calculating the after tax CF benfits in the year 4 and 5 (when company opted for automated kiosk)
[ (100,000 * (1-0.35)) - ((100,000 - 35,000) * (1 - 0.35))]
i.e., $ 22,750 per year
So,now calcualting the present value of the benefits over the 5 years :
= (3,250 / 1.10) + (3,250 / (1.10 ^ 2)) + (3,250 / (1.10 ^ 3)) + (22,750 / (1.10 ^ 2)) + (22,750 / (1.10 ^ 2))
= 2954.54 + 2685.95 + 2441.77 + 15,538.55 + 14,125.96
= $37,746.77
In terms of percentage 37.74% in savings.
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