Question

12. Texelco' new modem can go into production for an initial investment in production equipment of $4 million. The equipment will be depreciated straightline over 2 years to a value of zero. It will be sold after 2 years for $500,000. Production costs will equal $200 per modem. The modems will be sold for $375 each. The firm is setting aside working capital of $200,000 at the outset, recaptured at the end of year 2. Sales forecasts are at the top of the table. The project will end in 2 years. The firm's tax bracket is 30%, and the required rate of return on the project is 12%. What is project NPV? (4 pts) Start with this Table (1pt): Year 15000 15000 Sales (units of modems) Revenues Cost of Goods Sold Depreciation Figure out CF from operations in the above space and fill it in below. Then continue. (2.5 pts) Cash flow from operations excl WorkCapital Cash flow from WC Cash flow: Capital investment/divestment Total cash flow NPV = $ .... .... (0.5 pt)

Answer 1

A В C E F 2 4 5 Year 6 0 2 Sales units Revenues 7 15000 15000 5625000 8 5625000 3000000 COGS 3000000 Depreciation 10 2000000 2000000 Taxable profit 625000 625000 11 12 Таx 187500 187500 Net profit 13 437500 437500 14 15 Cash flow from operations Cash flow from WC Cash flow from capital investment/divestment Total cash flow 2437500 16 2437500 17 -200000 200000 -4000000 18 350000 2987500 19 -4200000 2437500 20 21 NPV 357955.99 22 23 24 LO

A. В E F G 2 4 5 Year 6 0 1 2. Sales units 15000 7 15000 Revenues -E7*375 =F7*375 8 -E7 200 =F7*200 9 COGS Depreciation 4000000/2 -4000000/2 10 Taxable profit 11 -E8-E9-E10 F8-F9-F10 12 Tax -E11*30% F11*30% Net profit -E11-E12 13 F11-F12 14 15 Cash flow from operations - E13+E10 -F13+F10 16 Cash flow from WC Cash flow from capital investment/divestment-4*10^6 --D17 17 -200000 -500000*(1-30%) 18 SUM(D16:D18) =SUM(E16:E18)-SUM(F16:F18) Total cash flow 19 20 =NPV(12 % ,E19: F19)+D19 21 NPV 22