Question

Question 1 Every two years, Warrior Lacrosse develops year, the company has invested $25,000 in their latest stick, the Warrior-X. In addition, the firm has hired a consultant, for $10,000 to determine whether there will be a market for the stick. The consultant has advised the firm to go ahead and start Warrior expects to the new equipment will be depreciated using 3-year MACRS. In three years, Warrior plans to sell the equipment for $25,000. The company expects to produce sell the new stick line for 3 years. They predict that they years. During the first year, they company expects sales from its current model, Warrior Cradle to decline by $100,000. After that, the Warrior Cradle willnlonger be produced The company predicts that operating company's tax rate is .21 and their required return is .09, should the stick be produced? Please show the project's NPV, IRR and Profitability Index a new lacrosse stick design. Over the past production equipment needed to mold the stick to cost $500,000. The can sell 300,000 sticks for $200 each in each of the three costs for the Warrior-X will be 25% of sales. If the 3-yea MACRS Depreciation (1).3333 (2).4444 (3).1482 (4).0742

Answer 1

Given Particulars Figure $ Units Company investment in past year Consultant Charges Cost of new equipment Expected Life of DC (MACRS depriciation) Salvage Value 25000 10000 500000 .. 3 Years 25000 Number of unit to be sold 300000 U Selling Price 200 Decline in sale of current model 100000 Operating cost 25% 21% Tax Rate 9% Discount Rate 3years MACRS depriciation rate 1 0.3333 2 0.4444 3 0.1482 0.0742 4 Solution: Step1 Calculate Depriciation Depriciation (Dn) Cost of Asset X MACRS depriciation rate for nth year = Depriciation for 3 years is:- Deprication Year MARCS Cost 1 0.3333 500000 166650 0.4444 500000 222200 74100 0.1482 500000 Purchase value - Depriciation for 3 years Book Value at eand of 3 year 37050 Step 2: Calculation of Cash Flow and Net Present Vale (NPV) Profit NCF CFADT CFAT Year Dep DIS CFSP CFC PV PV -500000 -500000 1 -500000 35505997 0.917 1 45000000 44733350 35505997 32574308.72 166650 100000 35339347 35596662 0.842 35593092 0.772 27484397.26 45000000 222200 44777800 35374462 35596662 29960998.23 74100 35565561 27531 45000000 44925900 35491461 NPV 89519704.21 Where, Profit No. of units X (Selling price-Operating Cost) 45000000 Depreciation (Dep.) Fictional Cash Flow (Used on for Tax Calulation) Decrease in sale of existing product DIS no operating cost and actual sale of existing product are given, hence ignored CFADT (Cash flow after Dep. & Tax) = CFADT (Cash flow after Tax) = CFSP Net CF X (1- Tax Rate) CFAT Depreciation Cash Flow due to Sale/ Purchase of Asset Cashflow due to sale is Sale Value (Sale value - Book value) X Tax Rate PVF (Present Value Factor) where r is Discount Rate and n is Number of year PV (Present Value) = 1/(1-r)An CFC X PVF Company investment in past year and Consultancy charges are sunk cost, hence they are ignored

Step 3: Calculation of IRR IRR is that rate of return at which NPV 0 Using excel formula or scientific calculator IRR 7101% I (Profitability Index) Step 4 Calculation of Present value of inflow PI Present value of outflow 90019704 500000 180.04 Note There seems some issue in Given figure in question, hence we had got such abnormal figures.