Question

We believe we can sell 450,000 home security devices per year at $93 per piece. They cost $74 to manufacture (variable cost). Fixed production costs run $215,000 per year. The necessary equipment costs $785,000 to buy and would be depreciated at a 25% CCA rate. The equipment would have a zero salvage value after the five-year life of the project. We need to invest $140,000 in net working capital up front; no additional net working capital investment is necessary. The discount rate is 19%, and the tax rate is 35%. What is the NPV of the project? (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

Answer 1

Calculation of NPV of the project is as follows:

Step 1 Initial Expenditure Equipment Cost Net Working Capital 785000 140000 925000 Step 2 Inbetween Cash lows Sales Less: Variable Cost Contribution Fixed Production Costs Depreciation EBT Tax @ 35% PAT-Profit after Tax Add: Depreciation Cash Flow After Tax Year 1 Year 2 Year 3 Year 4 Year 5 93 41850000 41850000 41850000 41850000 41850000 74 33300000 33300000 33300000 33300000 33300000 8550000 8550000 8550000 8550000 8550000 215000 215000 215000 215000 215000 98125 17171 153320 157920 203916 8236875 8163281 8181680 8177080 8131084 2882906 2857148 2863588 2861978 2845879 5353969 5306133 5318092 5315102 5285205 98125 171719 153320 157920 203916 5452094 5477852 5471412 5473022 5489121 Step 3 Terminal Cash flows 0 140000 Salvage Value Recapture of Working Capital Less: Tax @ 35% Net Cash Inflow 49000 91000 Step 4 NPV Analysis 1.19 Year Year o Year 1 Year 2 Year 3 Year 4 Year 5 Net Present value (NPV) CFAT DF @ 19% DCF -925000 1 -925000 5452094 0.840336 4581591 5477852 0.706165 3868266 5471412 0.593416 3246822 5473022 0.498669 2729225 5580121 0.419049 2338346 15839251 Working Note: Deprciation 25% CCA Equipment Cost 785000 Year 1 Year 2 Year 3 Year 4 Year 5 12.5 25 25 25 25 Depreciation 98125 171718.8 153320.3 157919.9 203916