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Viability of Business Opportunity

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To: Beth Wilson

From: Aman Gill, CPA

Subject: Viability of business opportunity

Viability of Business Opportunity

As can be seen by the projected cash flows, it seems that the business opportunity is feasible due to the net cash flows being positive, after 2007. The calculation of the cash flows has also steadily increased after 2007.  In terms of the cumulative cash flow the project does show that the cash flows are negative at first and begin to increase and become positive after 2007. The first year of the positive cash flows begin in 2009. The initial years have negative cash flow due to the large amount of investment required by the company. After the operations have actually begun the cash flows begin to become positive.

The main reason for the negative cash flows is the significant amount that is owed to EH in the first few years of operations. The amount is $550,000, which is owed to EH in the first 4 years.

In the long-term because the cash flows increase and become positive it does seem that it would be a good idea to go ahead with the PAW project. There are other reasons that this project should be implemented, including that this would allow you to start a business of your own and this has been a career aspiration of yours so this would be a good time to begin this project. You have the support of your father to continue with this project

Tax Implications of Beth leaving EH

The tax implications of you leaving EH are very important because it is important to know how much the value of cash you will leave with due to the significant amount of investment that will be required by PAW project. If you choose not to invest in the PAW project there will be a significant amount of cash that you will need to be managed.

In terms of the severance pay of $200,000 this will taxed at the marginal tax rate which in this case would be 45%, meaning that the remaining amount after tax would be $110,000.

The stock options have a more significant amount of after tax income. The exercise option on average is $2. Meaning that you can purchase 115,000 shares for $230,000. You will first need this original investment amount in order to purchase the stock. The market value of the shares is significant the total amount is $575,000, after removing the cost of purchasing the shares of $230,000 the gain would be $345,000, she can deduct 50% of this gain leaving the taxable gain at $172,500. After being taxed at 45% the net cash amount is $267,375.

The Mutual Funds

The mutual funds also provide a source of cash. The current market value of these mutual funds is 150,000 and the cost is $112,000. Therefore the gain on the proceeds will be $38,000. Leaving a taxable capital gain of $18,500. The after-tax cash available amount is $141,675.

To: Peter

From: Aman Gill, CPA

Subject: Implications of abandoning Project 3

This memo will outline the accounting implications of possibly selling the project to Beth, or possibly abandoning the project.

If the decision is made to not sell the project the deferred development costs will need to be written off first in 2004. Due to these not meeting the requirements in order to be capitalized for development costs.  

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