Question

Problem 8-24 Calculating Project NPV

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps to accent people’s homes. They projected unit sales of these lamps to be 8,100 in the first year, with growth of 5 percent each year for the next five years. Production of these lamps will require $46,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $106,000 per year, variable production costs are $12 per unit, and the units are priced at $40 each. The equipment needed to begin production will cost $186,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 40 percent and the required rate of return is 20 percent. What is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
NPV           $

Answer 1

	Year1	Year2	Year3	Year4	Year5	Total
Projected Sales (5% increse in each year)-rounded	8,100.00	8,505.00	8,930.00	9,377.00	9,846.00
Price per unit	40	40	40	40	40
Sales Vale	3,24,000.00	3,40,200.00	3,57,200.00	3,75,080.00	3,93,840.00
Variable Cost (12 per unit)	-97,200.00	-1,02,060.00	-1,07,160.00	-1,12,524.00	-1,18,152.00
Fixed Cost	-106000	-106000	-106000	-106000	-106000
Depreciation (186000/5)	-37,200.00	-37,200.00	-37,200.00	-37,200.00	-37,200.00
Profit before tax	83,600.00	94,940.00	1,06,840.00	1,19,356.00	1,32,488.00
Tax (40%)	-33,440.00	-37,976.00	-42,736.00	-47,742.40	-52,995.20
Profit after tax	50,160.00	56,964.00	64,104.00	71,613.60	79,492.80
Add- working capital no longer required					46,000.00
Add- Depreciation	37,200.00	37,200.00	37,200.00	37,200.00	37,200.00
Annual Cash inflow	87,360.00	94,164.00	1,01,304.00	1,08,813.60	1,62,692.80
Discount factor at 20%	0.833	0.694	0.579	0.482	0.402
Present value of cash flow	72,770.88	65,349.82	58,655.02	52,448.16	65,402.51	3,14,626.37

Total Present value of cash flow	3,14,626.37
Less:
Initial Outlay (cost of equipment)	1,86,000.00
Net working capital required at the beginning	46,000.00
Net Present Value	82,626.37

Sales unit rounded to nearest unit.

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