A law firm is considering investing in a complete small business. The intial investment will be 35,000$. The small business is in the 5-year MACRS category, and the firm's tax rate is 34%. The small business is expected to provide additional revenue of 15,000$ per year for the next 6 years, and to reduce expenses by 10,000$ per year for the same period.
Depreciation per the 6 years: 7,000 / 11,200 / 6,720 / 4,025 / 4,025 / 2,030
Factors per the 6 years .893 / .797 / .712 / .636 / .567 / .507
1) Calculate the net after-tax cash flow from the investment.
2) Calculate the net present value of the system, given that the law firm's weighter average cost of capital is 12%.
3) Should they invest in the small business?