Reto Sa

Reto S.A.
Question 1:
Since we are initially ignoring the effects of taxes and do not know the required return, (we initially know only that debt costs 8% but are not provided any information regarding equity costs) the only available option is to use either a non-time value based evaluation or the internal rate of return:
Cash Flow Time Amount Equipment Cost 0 SFr -600000 Revenue 1-10 2000000
Less Commissions-15% -300000
Less Materials -600000
Less Labor -900000 Before Tax Cash Flow SFr 200000 Internal Rate of Return 31.11%

Question 2:
Introducing taxes to the problem will change the annual cash flows although they remain an annuity since the depreciation is assumed to be an equal amount each year:
Cash Flow Time Amount Equipment Cost 0 SFr -600000 Revenue 1-10 2000000
Less Commissions-15% -300000
Less Materials -600000
Less Labor -900000
Less Depreciation -60000 Before Tax Profit SFr 140000
Less Taxes at 45% -63000
After Tax Profit 77000 Add Back Depreciation 60000 Annual Cash Flow 137000 Internal Rate of Return 18.732%

Question 3:
Knowing that Torgler wants a return of 12% permits the use of the NPV approach to the problem. We know it will be a positive NPV since Question 2 indicated a IRR greater than 12%, but it would still be interesting to know the actual number.
Using the cash flow data from the previous question and a discount rate of 12% yields a NPV of SFr 174,080.56 which is the Present Value of the Inflows = SFr 774,080.56 less the Present Value of the Outflows (Initial Investment) = SFr 600,000.
We could also break apart the two component parts of the total cash flow into the after tax operating cash flow and the depreciation tax