Marker’s Tattoo Studio wants to buy new laser therapy equipment

by | May 18, 2025 | Nursing

 

Marker’s Tattoo Studio wants to buy new laser therapy equipment. This new equipment would cost $300,000 to purchase and $20,000 to install. Marker’s estimates that this new equipment would yield incremental margins of $98,000 annually due to new client services. It would require incremental cash maintenance costs of $10,000 annually. Marker’s expects the life of this equipment to be 5 years. They estimate a terminal disposal value of $20,000.

Marker’s has a 25% income tax rate and depreciates assets on a straight-line basis (to terminal value) for tax purposes. The required rate of return on investments is 10%.

Determine the expected increase in annual net income from investing in the new equipment.
Calculate the accrual accounting rate of return based on average investment.
Summarize whether the new equipment is worth investing in from a net present value (NPV) standpoint.
Suppose that the tax authorities are willing to let Marker’s depreciate the new equipment down to zero over its useful life. If Marker’s plans to liquidate the equipment in 5 years, should it take this option? Quantify the impact of this choice on the NPV of the new equipment.

 

Sample solution

Dante Alighieri played a critical role in the literature world through his poem Divine Comedy that was written in the 14th century. The poem contains Inferno, Purgatorio, and Paradiso. The Inferno is a description of the nine circles of torment that are found on the earth. It depicts the realms of the people that have gone against the spiritual values and who, instead, have chosen bestial appetite, violence, or fraud and malice. The nine circles of hell are limbo, lust, gluttony, greed and wrath. Others are heresy, violence, fraud, and treachery. The purpose of this paper is to examine the Dante’s Inferno in the perspective of its portrayal of God’s image and the justification of hell. 

In this epic poem, God is portrayed as a super being guilty of multiple weaknesses including being egotistic, unjust, and hypocritical. Dante, in this poem, depicts God as being more human than divine by challenging God’s omnipotence. Additionally, the manner in which Dante describes Hell is in full contradiction to the morals of God as written in the Bible. When god arranges Hell to flatter Himself, He commits egotism, a sin that is common among human beings (Cheney, 2016). The weakness is depicted in Limbo and on the Gate of Hell where, for instance, God sends those who do not worship Him to Hell. This implies that failure to worship Him is a sin.


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God is also depicted as lacking justice in His actions thus removing the godly image. The injustice is portrayed by the manner in which the sodomites and opportunists are treated. The opportunists are subjected to banner chasing in their lives after death followed by being stung by insects and maggots. They are known to having done neither good nor bad during their lifetimes and, therefore, justice could have demanded that they be granted a neutral punishment having lived a neutral life. The sodomites are also punished unfairly by God when Brunetto Lattini is condemned to hell despite being a good leader (Babor, T. F., McGovern, T., & Robaina, K. (2017). While he commited sodomy, God chooses to ignore all the other good deeds that Brunetto did.

Finally, God is also portrayed as being hypocritical in His actions, a sin that further diminishes His godliness and makes Him more human. A case in point is when God condemns the sin of egotism and goes ahead to commit it repeatedly. Proverbs 29:23 states that “arrogance will bring your downfall, but if you are humble, you will be respected.” When Slattery condemns Dante’s human state as being weak, doubtful, and limited, he is proving God’s hypocrisy because He is also human (Verdicchio, 2015). The actions of God in Hell as portrayed by Dante are inconsistent with the Biblical literature. Both Dante and God are prone to making mistakes, something common among human beings thus making God more human.

To wrap it up, Dante portrays God is more human since He commits the same sins that humans commit: egotism, hypocrisy, and injustice. Hell is justified as being a destination for victims of the mistakes committed by God. The Hell is presented as being a totally different place as compared to what is written about it in the Bible. As a result, reading through the text gives an image of God who is prone to the very mistakes common to humans thus ripping Him off His lofty status of divine and, instead, making Him a mere human. Whether or not Dante did it intentionally is subject to debate but one thing is clear in the poem: the misconstrued notion of God is revealed to future generations.

 

References

Babor, T. F., McGovern, T., & Robaina, K. (2017). Dante’s inferno: Seven deadly sins in scientific publishing and how to avoid them. Addiction Science: A Guide for the Perplexed, 267.

Cheney, L. D. G. (2016). Illustrations for Dante’s Inferno: A Comparative Study of Sandro Botticelli, Giovanni Stradano, and Federico Zuccaro. Cultural and Religious Studies, 4(8), 487.

Verdicchio, M. (2015). Irony and Desire in Dante’s” Inferno” 27. Italica, 285-297.

Let’s analyze Marker’s Tattoo Studio’s potential investment in the new laser therapy equipment.

1. Expected Increase in Annual Net Income

First, we need to calculate the annual depreciation expense for tax purposes:

  • Depreciable Basis = Purchase Cost + Installation Cost – Terminal Value
  • Depreciable Basis = $300,000 + $20,000 – $20,000 = $300,000
  • Annual Depreciation Expense = Depreciable Basis / Useful Life
  • Annual Depreciation Expense = $300,000 / 5 years = $60,000

Now, we can calculate the annual net income:

  • Incremental Margin = $98,000
  • Incremental Cash Maintenance Costs = $10,000
  • Earnings Before Interest and Taxes (EBIT) = Incremental Margin – Incremental Cash Maintenance Costs – Depreciation Expense
  • EBIT = $98,000 – $10,000 – $60,000 = $28,000

Let’s analyze Marker’s Tattoo Studio’s potential investment in the new laser therapy equipment.

1. Expected Increase in Annual Net Income

First, we need to calculate the annual depreciation expense for tax purposes:

  • Depreciable Basis = Purchase Cost + Installation Cost – Terminal Value
  • Depreciable Basis = $300,000 + $20,000 – $20,000 = $300,000
  • Annual Depreciation Expense = Depreciable Basis / Useful Life
  • Annual Depreciation Expense = $300,000 / 5 years = $60,000

Now, we can calculate the annual net income:

  • Incremental Margin = $98,000
  • Incremental Cash Maintenance Costs = $10,000
  • Earnings Before Interest and Taxes (EBIT) = Incremental Margin – Incremental Cash Maintenance Costs – Depreciation Expense
  • EBIT = $98,000 – $10,000 – $60,000 = $28,000
  • Income Tax Expense = EBIT * Tax Rate
  • Income Tax Expense = $28,000 * 0.25 = $7,000
  • Annual Net Income = EBIT – Income Tax Expense
  • Annual Net Income = $28,000 – $7,000 = $21,000

The expected increase in annual net income from investing in the new equipment is $21,000.

2. Accrual Accounting Rate of Return (AARR)

The accrual accounting rate of return is calculated as:

  • AARR = (Average Annual Net Income) / (Average Investment)

We’ve already calculated the average annual net income as $21,000 (assuming it’s consistent over the 5 years).

Now, let’s calculate the average investment:

  • Initial Investment = Purchase Cost + Installation Cost = $300,000 + $20,000 = $320,000
  • Terminal Value (at the end of the life) = $20,000
  • Average Investment = (Initial Investment + Terminal Value) / 2
  • Average Investment = ($320,000 + $20,000) / 2 = $340,000 / 2 = $170,000

Now, we can calculate the AARR:

  • AARR = $21,000 / $170,000 = 0.1235 or 12.35%

The accrual accounting rate of return based on average investment is 12.35%.

3. Net Present Value (NPV) Analysis

To determine if the investment is worthwhile from an NPV standpoint, we need to calculate the present value of all future cash flows and compare it to the initial investment.

Annual After-Tax Cash Flow:

  • After-Tax Profit (excluding depreciation) = EBIT + Depreciation – Taxes
  • After-Tax Profit (excluding depreciation) = $28,000 + $60,000 – $7,000 = $81,000
  • Annual After-Tax Cash Flow = After-Tax Profit (excluding depreciation) + Depreciation
  • Annual After-Tax Cash Flow = $81,000 + $60,000 – $60,000 (depreciation is a non-cash expense but provided a tax shield)
  • Alternatively: Annual After-Tax Cash Flow = Incremental Margin – Incremental Cash Maintenance Costs – Taxes
  • Annual After-Tax Cash Flow = $98,000 – $10,000 – $7,000 = $81,000

Terminal Year Cash Flow:

In the final year (year 5), Marker’s will receive the terminal disposal value, which is an after-tax cash inflow since it’s assumed to be the book value at that point due to depreciation to terminal value.

  • Terminal Disposal Value (After-Tax) = $20,000

Calculate the Present Value of Each Cash Flow:

Using a discount rate of 10%:

  • Year 1 PV = $81,000 / (1 + 0.10)^1 = $73,636.36
  • Year 2 PV = $81,000 / (1 + 0.10)^2 = $66,942.15
  • Year 3 PV = $81,000 / (1 + 0.10)^3 = $60,856.50
  • Year 4 PV = $81,000 / (1 + 0.10)^4 = $55,324.09
  • Year 5 PV (Operating Cash Flow) = $81,000 / (1 + 0.10)^5 = $50,294.63
  • Year 5 PV (Terminal Value) = $20,000 / (1 + 0.10)^5 = $12,418.43

Calculate the Net Present Value (NPV):

  • NPV = -Initial Investment + PV of Year 1 + PV of Year 2 + PV of Year 3 + PV of Year 4 + PV of Year 5 (Operating) + PV of Year 5 (Terminal Value)
  • NPV = -$320,000 + $73,636.36 + $66,942.15 + $60,856.50 + $55,324.09 + $50,294.63 + $12,418.43
  • NPV = $3,472.16

Summary: Since the NPV is positive ($3,472.16), the new equipment is worth investing in from a net present value standpoint at a required rate of return of 10%.

4. Impact of Depreciating to Zero

If the tax authorities allow depreciation down to zero over the 5-year useful life:

  • Depreciable Basis = $300,000 + $20,000 – $0 = $320,000
  • Annual Depreciation Expense (new) = $320,000 / 5 years = $64,000

Now, let’s recalculate the annual net income and after-tax cash flow with this new depreciation schedule:

  • EBIT (new) = $98,000 – $10,000 – $64,000 = $24,000

  • Income Tax Expense (new) = $24,000 * 0.25 = $6,000

  • Annual Net Income (new) = $24,000 – $6,000 = $18,000

  • Annual After-Tax Cash Flow (new) = Incremental Margin – Incremental Cash Maintenance Costs – Taxes (new)

  • Annual After-Tax Cash Flow (new) = $98,000 – $10,000 – $6,000 = $82,000

In the terminal year, the book value of the asset will be $0. When Marker’s liquidates the equipment for $20,000, this will result in a taxable gain:

  • Taxable Gain on Disposal = Selling Price – Book Value = $20,000 – $0 = $20,000
  • Tax on Disposal = $20,000 * 0.25 = $5,000
  • After-Tax Cash Flow from Disposal = $20,000 – $5,000 = $15,000

Recalculate the NPV with the new depreciation schedule:

  • Year 1 PV = $82,000 / (1.10)^1 = $74,545.45

  • Year 2 PV = $82,000 / (1.10)^2 = $67,768.59

  • Year 3 PV = $82,000 / (1.10)^3 = $61,607.81

  • Year 4 PV = $82,000 / (1.10)^4 = $56,007.10

  • Year 5 PV (Operating Cash Flow) = $82,000 / (1.10)^5 = $50,915.55

  • Year 5 PV (Terminal Value) = $15,000 / (1.10)^5 = $9,313.82

  • NPV (new depreciation) = -$320,000 + $74,545.45 + $67,768.59 + $61,607.81 + $56,007.10 + $50,915.55 + $9,313.82

  • NPV (new depreciation) = $30,158.32

Quantify the Impact:

The NPV with depreciation down to zero is $30,158.32, while the NPV with depreciation to the terminal value is $3,472.16.

  • Impact on NPV = $30,158.32 – $3,472.16 = $26,686.16

Yes, if Marker’s plans to liquidate the equipment in 5 years, it should take the option to depreciate the new equipment down to zero over its useful life. This choice increases the NPV of the investment by $26,686.16. The reason for this increase is the larger tax shield provided by the higher depreciation expense in the early years, which has a higher present value than the tax paid on the disposal gain in the final year.

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