Question

1. A firm is evaluating a project which requires an investment of $5,600,000 in plant and equipment to produce a new multi-vitamin. The equipment will be depreciated straight line to zero over the project’s 4-year life. At the end of the project, the equipment will be salvaged for $750,000. Sales will be $3,000,000 beginning in year 1 and will increase by 5% each year of the project’s life. COGS will be 30% of sales. GS&A will be 8% of sales. The project will require an investment in NWC estimated at 10% of sales with full recovery at the end of the project. The project is expected to increase sales of plastic containers it produces in another division by $30,000 each year. Assume the firm’s tax rate = .34 and wacc = 10%. Calculate FCFs for each year of the project and determine the NPV. (NPV = $581,583.60)

Answer 1

	a) Depreciation per year	$
	Original Cost	5,600,000
	Salvage Value	750,000
	Net Depreciable part	4,850,000
	No of years	4
D	Depreciation per year	1,212,500
	Future Cashflows
	Cash Inflow
	Particulars	Year 1	Year 2	Year 3	Year 4	Total
A	Sales	3,000,000	3,150,000	3,307,500	3,472,875	12,930,375
B	Recovery of Working Capital				1,293,038	1,293,038
C	Salvage Value				750,000	750,000
	Total Inflow	3,000,000	3,150,000	3,307,500	5,515,913	14,973,413
	Cash outflow
	Particulars
	Initial Investment	5,600,000
B	COGS (30% of Sales)	900,000	945,000	992,250	1,041,863	3,879,113
C	GS & A (8% of Sales)	240,000	252,000	264,600	277,830	1,034,430
E	Investment in Net Working Capital (NWC)	300,000	315,000	330,750	347,288	1,293,038
G	Interest on Investment in NWC	30,000	31,500	33,075	34,729
F	Tax ( E *34%)	209,950	241,060	273,726	308,024	1,032,760
	Total Outflow	7,279,950	1,784,560	1,894,401	2,009,733	7,239,340
	Net free cashflows	(4,279,950)	1,365,440	1,413,100	3,506,179	2,004,769
	Weighted Avg Cost of Capital (WACC)	10%
	Net Present Value	694,050
E	Net Profit	617,500	709,000	805,075	905,954	3,037,529
	(A - B - C - D - G)