Question

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $30. Year Unit Sales 36,000 44,000 13,000 7,000 Thereafter It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year O) investment in working capital of 20 36,000 $40 = $288,000. Plant and equipment necessary to establish the giftware business will require an additional investment of $214,000. This investment will be depreciated straight-line over 3 years. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 30%. The discount rate is 15%. a. What is the net present value of the project? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) Net present value b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) Increase in NPV

Answer 1

E20 X fix =N17-N8 A B C D Contributi Depreciatio on per unit n AwN Sale 1 Year units 2 0 3 1 36,000 4 21 44.000 5 3 13,000 6 4 7,000 7 8 9 E F G H I J K L M N Operating Net Depreci cash working Total cash PVIF@ Present PBT Tax@30% PAT ation flows capital Investment flows 15% |(288,000)| (214,000)| (502,000)| 1.000 $ (502,000) 288,667 86,600 202,067 71,333 273,400 (64,000) 209,400 0.870 $ 182,087 368,667 110,600 258,067 | 71,333 329,400 248,000 577,400 0.756 $ 436,597 58,667 17,600 41,067 71,333 112,400 48,000 160,400 0.658 $ 105,466 70,000 21,000 49,000 - 49,000 56,000 105,000 0.572 $ 60,034 10 10 10 10 71,333 71,333 71,333 - 600 V Net present value $ 282,184 Contributi Depreciatio on per unit n PBT Tax@30% PAT 10 Sale 10 Year units 11 0 12 1 36,000 244,000 3 13,000 15 4 7,000 16 17 18 Operating Net Depreci cash working Total cash PVIF@ Present ation flows capital Investment flows 15% value (288,000) (140,000) (428,000)| 1.000 $ (428,000) 252,000 (64,000) 188,000 0.870 $ 163,478 308,000 248,000 556,000 0.756 $ 420,416 91,000 48,000 139,000 0.658 $ 91,395 - 49,000 56,000 105,000 0.572 $ 60,034 107 360,000 440,000 130,000 70,000 108,000 132,000 39,000 21,000 252,000 308,000 91,000 49,000 10 10 - Net present value $ 307,323 19 Net present value $ 282,184 20 Increase in NPV / $ 25,139

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