(Appendix 12A)Professor Mills is thinking about publishing a self-help guide for people who wish to prepare their own income tax returns. She has spent the last year working on the book and estimates that she spent roughly 200 hours on it. Her time is worth $20 per hour. She plans to publish the book herself. To do this, she has to purchase a copy machine costing $75,000 and employ someone to run the machine at $8,000 per year. The variable cost per book will be about $2.00. She will sell the books for $8.00. She is planning to update the book each year for five years. Updates will require about 50 hours per year of her time. Mills believes that she can sell about 5,000 books per year. The copy machine qualifies for the three-year MACRS category (0.3333 first year, 0.4445 second year, 0.1481 third year, and 0.0741 fourth year). Her marginal income tax rate is 25%. If she does not invest in this opportunity, she can invest the $75,000 in a mutual fund that has been returning 10%-15% per year over the last few years. Mills has asked you to help her decide whether she should buy the machine and become a publisher.
a)Create a cash flow schedule using the nominal method, assuming a risk-free rate of 4%, a risk premium of 6%, and an inflation rate of 2%. Determine the NPV.
b)When you present your calculations to Professor Mills, she suggests that some of the costs or rates might change over time. You have already thought about this, and you present her with some sensitivity analysis. (She is very impressed.)Identify three things that you varied in your analysis, and explain your choices.
c)Identify two potential costs for this project that Professor Mills might have overlooked.
d)Write a brief paragraph for Professor Mills that discusses the pros and cons of launching the project.

Question

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The Answer of (Appendix 12A)Professor Mills is thinking about publishing a self-help guide for people who wish to prepare their own income tax returns. She has spent the last year working on the book and estimates that she spent roughly 200 hours on it. Her time is worth $20 per hour. She plans to publish the book herself. To do this, she has to purchase a copy machine costing $75,000 and employ someone to run the machine at $8,000 per year. The variable cost per book will be about $2.00. She will sell the books for $8.00. She is planning to update the book each year for five years. Updates will require about 50 hours per year of her time. Mills believes that she can sell about 5,000 books per year. The copy machine qualifies for the three-year MACRS category (0.3333 first year, 0.4445 second year, 0.1481 third year, and 0.0741 fourth year). Her marginal income tax rate is 25%. If she does not invest in this opportunity, she can invest the $75,000 in a mutual fund that has been returning 10%-15% per year over the last few years. Mills has asked you to help her decide whether she should buy the machine and become a publisher.
a)Create a cash flow schedule using the nominal method, assuming a risk-free rate of 4%, a risk premium of 6%, and an inflation rate of 2%. Determine the NPV.
b)When you present your calculations to Professor Mills, she suggests that some of the costs or rates might change over time. You have already thought about this, and you present her with some sensitivity analysis. (She is very impressed.)Identify three things that you varied in your analysis, and explain your choices.
c)Identify two potential costs for this project that Professor Mills might have overlooked.
d)Write a brief paragraph for Professor Mills that discusses the pros and cons of launching the project.

(Appendix 12A)Professor Mills Is Thinking About Publishing a Self-Help Guide