Case 13: Infomercial Entertainment, Inc.

Depreciation Schedule

Year MACRS %
1 20%
2 32%
3 19%
4 12%
5 11%
6 6%
Depreciation Tax Savings Book Value Depreciable Basis $ 225,000.00
$ 45,000.00 $ 15,750.00 $ 180,000.00 Tax 35%
$ 72,000.00 $ 25,200.00 $ 108,000.00 Sale Price $ 20,000.00
$ 42,750.00 $ 14,962.50 $ 65,250.00
$ 27,000.00 $ 9,450.00 $ 38,250.00
$ 24,750.00 $ 8,662.50 $ 13,500.00
$ 13,500.00 $ 4,725.00 $ -

Finding Cash Flows

Project 1-Infomercial Video

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Revenue $ 50,000.00 $ 52,500.00 $ 55,125.00 $ 57,881.25 $ 60,775.31 $ 63,814.08 $ 67,004.78 $ 70,355.02 $ 73,872.77 $ 77,566.41
Costs (62% Revenue) $ 31,000.00 $ 32,550.00 $ 34,177.50 $ 35,886.38 $ 37,680.69 $ 39,564.73 $ 41,542.96 $ 43,620.11 $ 45,801.12 $ 48,091.17
Profit Before Tax $ 19,000.00 $ 19,950.00 $ 20,947.50 $ 21,994.88 $ 23,094.62 $ 24,249.35 $ 25,461.82 $ 26,734.91 $ 28,071.65 $ 29,475.24
Profit After Tax $ 12,350.00 $ 12,967.50 $ 13,615.88 $ 14,296.67 $ 15,011.50 $ 15,762.08 $ 16,550.18 $ 17,377.69 $ 18,246.57 $ 19,158.90

CF 0 1 2 3 4 5 6 7 8 9 10
Initial Investment $ (225,000.00)
Tax Savings $ 15,750.00 $ 25,200.00 $ 14,962.50 $ 9,450.00 $ 8,662.50 $ 4,725.00 $ - $ - $ - $ -
Net Working Capital $ (10,000.00) $ 10,000.00
Net Operating Income $ 12,350.00 $ 12,967.50 $ 13,615.88 $ 14,296.67 $ 15,011.50 $ 15,762.08 $ 16,550.18 $ 17,377.69 $ 18,246.57 $ 19,158.90
Net Salvage Value $ 13,000.00
$ (235,000.00) $ 28,100.00 $ 38,167.50 $ 28,578.38 $ 23,746.67 $ 23,674.00 $ 20,487.08 $ 16,550.18 $ 17,377.69 $ 18,246.57 $ 42,158.90
IRR(1) 1.73078%
NPV(1) ($73,364.30)

Project 2-Sales Video

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Revenue $ 35,000.00 $ 37,450.00 $ 40,071.50 $ 42,876.51 $ 45,877.86 $ 49,089.31 $ 52,525.56 $ 56,202.35 $ 60,136.52 $ 64,346.07
Costs (53% Revenue) $ 18,550.00 $ 19,848.50 $ 21,237.90 $ 22,724.55 $ 24,315.27 $ 26,017.33 $ 27,838.55 $ 29,787.25 $ 31,872.35 $ 34,103.42
Profit Before Tax $ 16,450.00 $ 17,601.50 $ 18,833.61 $ 20,151.96 $ 21,562.59 $ 23,071.98 $ 24,687.01 $ 26,415.11 $ 28,264.16 $ 30,242.65
Profit After Tax $ 10,692.50 $ 11,440.98 $ 12,241.84 $ 13,098.77 $ 14,015.69 $ 14,996.78 $ 16,046.56 $ 17,169.82 $ 18,371.71 $ 19,657.73

CF 0 1 2 3 4 5 6 7 8 9 10
Initial Investment $ (225,000.00)
Tax Savings $ 15,750.00 $ 25,200.00 $ 14,962.50 $ 9,450.00 $ 8,662.50 $ 4,725.00 $ - $ - $ - $ -
Net Working Capital $ (5,000.00) $ 5,000.00
Net Operating Income $ 10,692.50 $ 11,440.98 $ 12,241.84 $ 13,098.77 $ 14,015.69 $ 14,996.78 $ 16,046.56 $ 17,169.82 $ 18,371.71 $ 19,657.73
Net Salvage Value $ 13,000.00
$ (230,000.00) $ 26,442.50 $ 36,640.98 $ 27,204.34 $ 22,548.77 $ 22,678.19 $ 19,721.78 $ 16,046.56 $ 17,169.82 $ 18,371.71 $ 37,657.73
IRR(2) 1.17198%
NPV(2) ($76,071.27)

Project 1 & 2

CF 0 1 2 3 4 5 6 7 8 9 10
Initial Investment $ (225,000.00)
Tax Savings $ 15,750.00 $ 25,200.00 $ 14,962.50 $ 9,450.00 $ 8,662.50 $ 4,725.00 $ - $ - $ - $ -
Net Working Capital $ (15,000.00) $ 15,000.00
Net Operating Income $ 23,042.50 $ 24,408.48 $ 25,857.72 $ 27,395.44 $ 29,027.19 $ 30,758.86 $ 32,596.74 $ 34,547.51 $ 36,618.28 $ 38,816.63
Net Salvage Value $ 13,000.00
$ (240,000.00) $ 38,792.50 $ 49,608.48 $ 40,820.22 $ 36,845.44 $ 37,689.69 $ 35,483.86 $ 32,596.74 $ 34,547.51 $ 36,618.28 $ 66,816.63
IRR(1&2) 10.92170%
NPV(1&2) $9,665.84
 Payback Period

Project 1-Infomercial Video Project 2-Sales Video Project 1 & 2

Year CF CumCF Year CF CumCF Year CF CumCF

0 $ (235,000.00) $ (235,000.00) 0 $ (230,000.00) $ (230,000.00) 0 $ (240,000.00) $ (240,000.00)
1 $ 28,100.00 $ (206,900.00) 1 $ 26,442.50 $ (203,557.50) 1 $ 38,792.50 $ (201,207.50)
2 $ 38,167.50 $ (168,732.50) 2 $ 36,640.98 $ (166,916.53) 2 $ 49,608.48 $ (151,599.03)
3 $ 28,578.38 $ (140,154.13) 3 $ 27,204.34 $ (139,712.18) 3 $ 40,820.22 $ (110,778.81)
4 $ 23,746.67 $ (116,407.46) 4 $ 22,548.77 $ (117,163.41) 4 $ 36,845.44 $ (73,933.37)
5 $ 23,674.00 $ (92,733.45) 5 $ 22,678.19 $ (94,485.22) 5 $ 37,689.69 $ (36,243.68)
6 $ 20,487.08 $ (72,246.38) 6 $ 19,721.78 $ (74,763.44) 6 $ 35,483.86 $ (759.82)
7 $ 16,550.18 $ (55,696.20) 7 $ 16,046.56 $ (58,716.88) 7 $ 32,596.74 $ 31,836.92
8 $ 17,377.69 $ (38,318.51) 8 $ 17,169.82 $ (41,547.06) 8 $ 34,547.51 $ 66,384.43
9 $ 18,246.57 $ (20,071.93) 9 $ 18,371.71 $ (23,175.36) 9 $ 36,618.28 $ 103,002.71
10 $ 42,158.90 $ 22,086.97 10 $ 37,657.73 $ 14,482.37 10 $ 66,816.63 $ 169,819.34
Payback (Years) 9.48 Payback (Years) 9.62 Payback (Years) 6.02

Discounted Payback Period

Project 1-Infomercial Video Project 2-Sales Video Project 1 & 2

Year CF DiscCF CumDiscCF Year CF DiscCF CumDiscCF Year CF DiscCF CumDiscCF

0 $ (235,000.00) $ (235,000.00) $ (235,000.00) 0 $ (230,000.00) $ (230,000.00) $ (230,000.00) 0 $ (240,000.00) $ (240,000.00) $ (240,000.00)
1 $ 28,100.00 $25,089.29 $ (209,910.71) 1 $ 26,442.50 $23,609.38 $ (206,390.63) 1 37135 $33,156.25 $ (206,843.75)
2 $ 38,167.50 $30,426.90 $ (179,483.82) 2 $ 36,640.98 $29,209.96 $ (177,180.66) 2 48081.95 $38,330.64 $ (168,513.11)
3 $ 28,578.38 $20,341.52 $ (159,142.29) 3 $ 27,204.34 $19,363.51 $ (157,817.15) 3 39446.1865 $28,077.02 $ (140,436.10)
4 $ 23,746.67 $15,091.44 $ (144,050.86) 4 $ 22,548.77 $14,330.15 $ (143,487.00) 4 35647.544555 $22,654.66 $ (117,781.44)
5 $ 23,674.00 $13,433.26 $ (130,617.59) 5 $ 22,678.19 $12,868.21 $ (130,618.79) 5 36693.8726739 $20,821.09 $ (96,960.35)
6 $ 20,487.08 $10,379.39 $ (120,238.20) 6 $ 19,721.78 $9,991.67 $ (120,627.12) 6 34718.568761 $17,589.51 $ (79,370.84)
7 $ 16,550.18 $7,486.46 $ (112,751.74) 7 $ 16,046.56 $7,258.65 $ (113,368.47) 7 32093.1185743 $14,517.30 $ (64,853.55)
8 $ 17,377.69 $7,018.56 $ (105,733.18) 8 $ 17,169.82 $6,934.60 $ (106,433.87) 8 34339.6368745 $13,869.20 $ (50,984.34)
9 $ 18,246.57 $6,579.90 $ (99,153.28) 9 $ 18,371.71 $6,625.02 $ (99,808.84) 9 36743.4114557 $13,250.04 $ (37,734.30)
10 $ 42,158.90 $13,574.04 $ (85,579.25) 10 $ 37,657.73 $12,124.78 $ (87,684.06) 10 $ 66,816.63 $21,513.17 $ (16,221.13)

Profitability Index Chart Title

Project 1-Infomercial Video Project 2-Sales Video Project 1 & 2

PI PI PI
$ 257,086.97 1.094 $ 244,482.37 1.063 $ 244,482.37 1.040
$ 235,000.00 $ 230,000.00 $ 235,000.00 $200,000.00

$150,000.00
Diff CF (project 1-project 2) Rate Infomercial Video Training Video Project 1 & 2
0% $ 22,086.97 $ 14,482.37 $ 169,819.34 $100,000.00

NPV
Year CF 1% $ 8,954.09 $ 2,041.20 $ 147,632.09
$50,000.00
0 $ (5,000.00) 2% $ (3,170.54) $ (9,449.42) $ 127,181.48
1 1657.50 3% $ (14,381.46) $ (20,078.23) $ 108,303.94 $-
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
2 1526.53 4% $ (24,763.08) $ (29,924.49) $ 90,853.36
3 1374.03 5% $ (34,390.93) $ (39,059.16) $ 74,699.02 $(50,000.00)
4 1197.90 6% $ (43,332.69) $ (47,545.84) $ 59,723.79
$(100,000.00)
5 995.82 7% $ (51,649.05) $ (55,441.60) $ 45,822.61
6 765.29 8% $ (59,394.54) $ (62,797.73) $ 32,901.09 $(150,000.00) Rate of Return
7 503.62 9% $ (66,618.22) $ (69,660.42) $ 20,874.33
8 207.87 10% $ (73,364.30) $ (76,071.27) $ 9,665.84
9 -125.13 11% $ (79,672.64) $ (82,067.84) $ (793.36) Conclusion:
10 4501.18 12% $ (85,579.25) $ (87,684.06) $ (10,565.57) Based on the cash flows, we have concluded that combining both projects would be the best
IRR(1-2) 22.3% 13% $ (91,116.70) $ (92,950.64) $ (19,707.13) option given that that the IRR and NPV for the combined project is higher than that of the
14% $ (96,314.48) $ (97,895.40) $ (28,269.02) individual projects. Based on the payback periods, they are all unacceptable because they all
15% $ (101,199.36) $ (102,543.57) $ (36,297.50) exceed the 4 year period for payback
16% $ (105,795.60) $ (106,918.08) $ (43,834.51) If the projects were mutually exclusiv,e the option of combining the two would be the best
17% $ (110,125.28) $ (111,039.76) $ (50,918.19) choice in every situation. If we were to remove this option, we would choose project one
18% $ (114,208.49) $ (114,927.59) $ (57,583.21) based on a higher IRR and NPV, project one based on a shorter payback period, and project
one based on a higher profitability index.
19% $ (118,063.54) $ (118,598.88) $ (63,861.19)
20% $ (121,707.12) $ (122,069.41) $ (69,780.91)