Question

XYZ Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This calculator will sell for $100. The company feels that sales will be 12,500, 13,000, 14,000, 13,200, and 12,500 units per year for the next 5 years. Variable costs will be 25% of sales, and fixed costs are $300,000 per year. The firm hired a marketing team to analyze the viability of the product and the marketing analysis cost $1,500,000. The company plans to use a vacant warehouse to manufacture and store the calculators. Based on a recent appraisal the warehouse and the property is worth $2.5 million on an after-tax basis. If the company does not sell the property today then it will sell the property 5 years from today at the currently appraised value. This project will require an injection of net working capital at the onset of the project in the amount of $100,000. This networking capital will be fully recovered at the end of the project. The firm will need to purchase some equipment in the amount of $1,200,000 to produce the new calculators. The machine has a 7-year life and will be depreciated using the straight-line method. At the end of the project, the anticipated market value of the machine is $150,000. The firm requires a 10% return on its investment and has a tax rate of 21%.

1. .    Calculate the book value of the machine at the end of year 5. (Round to two decimals)
2.      Calculate the operating cash flows at the end of year 1. (Round to two decimals)
3.     Calculate the initial cash outflow (e.g. the time 0 cash flow). (Enter a negative value and round to two decimals)
4.     Calculate the net present value for the project. (Round to 2 decimals)

Answer 1

E3 : x fix =1200000/7 A B C D E F G H I J K L M N O Net Sale Contributio Depreciatio Depreciati Operating working Capital Total cash PVIF@ Present 1 Year units n per unit Fixed costs n PBT Tax@21% PAT on cash flows capital spending flows 10% value 2 0 (100,000) $ (3,700,000) $ (3,800,000) 1.000 $ (3,800,000) 3 1 12,500 $ 75 $ 300,000 $ 171,429 $ 466,071 $ 97,875 $368,196 $171,429 $ 539,625 $ 539,625 0.909 $ 490,568 2 13,000 $ 75 $ 300,000 $ 171,429 $ 503,571 $ 105,750 $397,821 $171,429 $ 569,250 $ 569,250 0.826 $ 470,455 314,000 $ 75 $ 300,000 $ 171,429 $ 578,571 $ 121,500 $457,071 $171,429 $ 628,500 $ 628,500 0.751 $ 472,201 4 13,200 $ 75 $ 300,000 $ 171,429 $ 518,571 $ 108,900 $409,671 $171,429 $ 581,100 $ 581,100 0.683 $ 396,899 5 12,500 $ 75 $ 300,000 $ 171,429 $ 466,071 $ 97,875 $368,196 $171,429 $ 539,625 100,000 $2,690,500 $ 3,330,125 0.621 $ 2,067,746 Net present value $ 97,869 17 Asset cost $1,200,000 Less: Depreciation charged $ 857,143 WDV of machine at the time of sale $ 342,857 Sale value of machine $ 150,000 Profit/(Loss) on sale $ -192,857 Less:Tax@21% $ -40,500 After tax cash flows from sale of asset $ 190,500 18 19 Book value in Year 5 $ 342,857.14 20 Operating cash flows $ 539,625.00 21 Initial cash flow -$3,800,000.00 22 Net present value $ 97,868.82

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