Question

Q3. (25 marks) A project requires initial fixed asset investment of $600,000, which will be depreciated straight line to zero over the six year life of the project. The pre-tax salvage value of the fixed astets at the end of the project is estimated to be $50,001. Projected sales volume for each year of the project is shown below. The sale price is $50 per unit for the first three years, and $45 per mit for years through 1A $30,000 initial investment in net working capital is required, with additional investments equal to 75% of annual sales for each year of the project. Variable costs are $35 per unit, and fixed costs are $50,000 per year. The firm has a tax rate of 34% and a required return on investment of 12% Year Sales 2 12.500 3 15,625 4 19,531 6 30,518 24.414 10.000 Calculate NPV by showing detailed calculations

is ok for the fraction as well

Answer 1

Year Sales Sale price Al Sales revenue Calculation of cash flow 1 2 3 41 5 6 in units 10000 12500 15625 19531 24414 30518 per unit 50 50 50 45 45 45 in amount ($) 500,000.00 625,000.00 781,250.00 878,895.00 1,098,630.00 1,373,310.00 Variable cost B Variable cost C Fixed Cost D Depreciation El Total expenses per unit 35 35 35 35 35 351 ($) 350,000.00 437,500.00 546,875.00 683,585.00 854,490.00 1,068,130.00 ($) 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 SLM 6years 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 (B+C+D) 500,000.00 587,500.00 696,875.00 833,585.00 1,004,490.00 1,218,130.00 (A-E) - F| Profit/(loss) G|Tax H| Profit/(loss) after tax Add depreciation Cash inflow KlAdditional working capital Net cash inflow 37,500.00 84,375.00 45,310.00 34% - 12,750.00 28,687.50 15,405.40 ($) 24,750.00 55,687.50 29,904.60 ($) 100,000.00 100,000.00 100,000.00 100,000.00 ($) 100,000.00 124,750.00 124,750.00 155,687.50 129,904.60 7.50% 37,500.00 46,875.00 58,593.75 65,917.13 62,500.00 77,875.00 97,093.75 63,987.48 94,140.00 32,007.60 62,132.40 100,000.00 162,132.40 82,397.25 79,735.15 155,180.00 52,761.20 102,418.80 100,000.00 202,418.80 102,998.25 (J-K) 99,420.55 4 6 63,987.48 79,735.15 Year Cash inflow B Salvage value C|Total inflow DPV factor @ 12% EPV of cash inflows Computation of PV of CIF 1 2 3 ($) 62,500.00 77,875.00 97,093.75 ($) 62,500.00 77,875.00 97,093.75 ($) 0.893 0.797 0.712 55,812.50 62,066.38 69,130.75 (A+B) 63,987.48 0.636 40,696.03 79,735.15 0.567 45,209.83 99,420.55 50,001.00 149,421.55 0.507 75,756.73 (C*D) Total PV of cash inflows Less: Initial cash outlay NPV 55812.50+62066.38+69130.75+40696.03+45209.83+75756.73 348,672.22 (630,000.00) (281,327.78) Recommendation: The project should not be accepted in view of negative NPV. The project is financially not viable. Notes: Initial cash outlay Fixed asset investment Working capital Amount ($) 600,000 30,000 630,000