Question

9. Company Y is developing a new product line.  The product line will be a new gaming system to compete with XBOX.  The product requires an investment of $567,000 for inventory and $22,000 for shipping.  The Company has a WACC of 7% and an effective tax rate of 40%.  This product is expected to generate the following results:

   Sales

   Year                # of Units                   Price

   1                      3,000                           $228 per unit

   2                      4,365                           $231 per unit

   3                      4,900                           $240 per unit

   4                      5,800                           $250 per unit

   Costs

   Year                Type of Cost              Amount

   1                      Direct Costs                $125 per unit

   2                      Direct Costs                $130 per unit

   3                      Direct Costs                $135 per unit

   4                      Direct Costs                $140 per unit

   The Company has to pay rent of $125,000 each year for its facility (rent), $40,000 for utilities and pays 5% of total revenue in annual bonuses.

   What is the NPV, IRR, MIRR and Payback period for the project?  Would you do the project or not?

Answer 1

	1	2	3	4	total
units	3000	4365	4900	5800
sale	684000	1008315	1176000	1450000
cost	375000	567450	661500	812000
profit	309000	440865	514500	638000
rent	125000	125000	125000	125000
utilities	40000	40000	40000	40000
Bonus	34200	50415.75	58800	72500
cashflow	109800	225449.3	290700	400500
tax 40%	43920	90179.7	116280	160200
profit after tax	65880	135269.6	174420	240300
wacc 7%	0.935	0.873	0.816	0.763
PV of inflow	61597.8	118090.3	142326.7	183348.9	505363.7
inestment in inventory					567000
shipping					22000
NPV					-83636.3

0	1	2	3	4
-589000	65880	135269.6	174420	240300
IRR	2%

MIRR = (Future value of positive cash flows / present value of negative cash flows) (1/n) – 1

taking finance cost as 7%

MIRR = 3%

Payback period= initial investment/ periodic cash inflows

2yrs + (589000-109800-225449.3)/290700

2.87 yrs