Question

Silver Sun Aviation is evaluating the medical clinic project, a 2-year project that would invoive buying equipmene for 56,000 dlars that wouid be depneclated to zero over 2 years using straight depreciation Cash to s from capitai spendr g would be SO in year 1 and 21 000 dolars in year 2 Relevant annual even es ar℃ expected to be 112.000 dolars in year 1 a d 112,000 dolars year 2 Relevant expected annual variable costs from the project are expected to be 15,000 dolars in year 1 and 15,000 dollars in year 2. Finally, the firm has no fixed costs in year 1 and one fxed cost in year 2 of the project. Yesterday, Slver Sun Avlation signed a deal with Green Forest Marketing to oeveop an aovertising campsgn The lerms of the deal require Siver Sun Aiation to pay Green Forns Marketing eit er 58,000 dollars in 2 years from today iren medical ciri propect is pursued or 39 000 dolars i, 2 yearsh today if the medical cinic pro ect is not pursed. The ณ ate as 40 p rent an contt the cotof aplal tor heia dinie priet s 13 pecentn Number

Answer 1

Initial investment		=	$56,000
Life		=	2 years
Depreciation		=	56000/2=$28000 per year
Cash inflow from capital spending(net of tax)(yr 2)		=	21000*(1-0.4)
		=	$12600
Annual cashflow		=	[(revenue - vc-dep)*(1-taxrate)]+28000
		=	[(112000-15000-28000)*(1-0.4)]+28000
		=	(69000*0.6)+28000
		=	$69,400
Relevant advertising cost(net of tax)(yr 2)		=	($58000-$39000)*(1-0.4)
		=	$11,400
	PV of cash inflow	=	CF in year 1*PVAF(13.31%,1)+Cf in year 2 *PVAF(13.31%,2)
		=	(69400*0.8825)+(69400-11400+12600)*0.7789
		=	61248+54988
	NPV	=	PV of cash inflow-initial investment
		=	$116598-58000
		=	$60,236
	Note
	Only relevant amount of advertising expenditure is considered.
	$39000 will be incurred even if the project is not undertaken,hence it is ignored.
	Only incremental exp is deducted while calculating cashflow for year 2.
	There may be minor difference due to decimal places.Please do not downvote on that basis