Question

With a $100,000 investment in a new injection moulding machine, A-Design Inc., a company specialized in the design and manufacturing of armrests for wheelchairs was able to achieve an operating income of $36,000 in its first year of production. Interest expenses on the money A-Design has borrowed totals $5,000 per year.

1. Calculate the net profit of A-Design Inc. for an income tax rate of 25%.

2. DeterminethereturnoninvestmentofA-DesignInc. for its new injection moulding machine.

3. What is the simple payback period (in years) for the injection moulding machine investment?

4. With a net unit price of $5 per armrest, how many armrests must A-Design sell to break-even with respect to the investment?

5. PerformasensitivityanalysisonthenetprofitofA- Design Inc. for an income tax rate of 20% and 30%.

Answer 1

1. Net profit = (Operating income - Interest) * (1 - Tax)

Net profit = (36000 - 5000) * (1 - 0.25)

Net profit = $23250

2. Return on Investment = Net Profit / Investment = $23250 / 100000 = 23.25%

3. Simple Payback Period = Investment / Net Profit = 4.30 Years

4. PreTax Income required to break even = 100000 / 0.75 = $133333.33

Sale Required to Break Even = $133333.33 / $5 = 26667 Units

5. Net Profit at 20% Tax = (Operating income - Interest) * (1 - Tax)

Net Profit at 20% Tax = (36000 - 5000) * (1 - 0.20)

Net Profit at 20% Tax = $24800

Net Profit at 30% Tax = (Operating income - Interest) * (1 - Tax)

Net Profit at 30% Tax = (36000 - 5000) * (1 - 0.30)

Net Profit at 30% Tax = $21700