Homework Answers
NPV of the project is $-31,395 (or can be $-31,396 because of rounding)
NPV Computation:
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Initial investment | $ (600,000) | ||||||
| Sales units | 10000 | 12500 | 15625 | 19531 | 24414 | 30518 | |
| Selling price/unit | $ 50 | $ 50 | $ 50 | $ 45 | $ 45 | $ 45 | |
| Variable cost/unit | $ 35 | $ 35 | $ 35 | $ 35 | $ 35 | $ 35 | |
| Sales revenue | $ 500,000 | $ 625,000 | $ 781,250 | $ 878,895 | $ 1,098,630 | $ 1,373,310 | |
| Variable cost | $ 350,000 | $ 437,500 | $ 546,875 | $ 683,585 | $ 854,490 | $ 1,068,130 | |
| Fixed cost | $ 50,000 | $ 50,000 | $ 50,000 | $ 50,000 | $ 50,000 | $ 50,000 | |
| Depreciation | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | |
| EBIT | $ - | $ 37,500 | $ 84,375 | $ 45,310 | $ 94,140 | $ 155,180 | |
| Tax@34% | $ - | $ 12,750 | $ 28,688 | $ 15,405 | $ 32,008 | $ 52,761 | |
| Net income | $ - | $ 24,750 | $ 55,688 | $ 29,905 | $ 62,132 | $ 102,419 | |
| Depreciation | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | |
| Operating cash flow | $ 100,000 | $ 124,750 | $ 155,688 | $ 129,905 | $ 162,132 | $ 202,419 | |
| Net working capital | $ (30,000) | $ (7,500) | $ (9,375) | $ (11,719) | $ (7,323) | $ (16,480) | $ (20,601) |
| Recouped | $ 102,998 | ||||||
| Post-tax salvage value | $ 33,001 | ||||||
| Free cash flow | $ (630,000) | $ 92,500 | $ 115,375 | $ 143,969 | $ 122,581 | $ 145,652 | $ 317,817 |
| PVF @12% | 1.000 | 0.893 | 0.797 | 0.712 | 0.636 | 0.567 | 0.507 |
| NPV | $ (630,000) | $ 82,589 | $ 91,976 | $ 102,474 | $ 77,903 | $ 82,647 | $ 161,016 |
| Project NPV | $ (31,395) |
Excel formula view:
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Initial investment | -600000 | ||||||
| Sales units | 10000 | 12500 | 15625 | 19531 | 24414 | 30518 | |
| Selling price/unit | 50 | 50 | 50 | 45 | 45 | 45 | |
| Variable cost/unit | 35 | 35 | 35 | 35 | 35 | 35 | |
| Sales revenue | =+D5*D4 | =+E5*E4 | =+F5*F4 | =+G5*G4 | =+H5*H4 | =+I5*I4 | |
| Variable cost | =+D4*D6 | =+E4*E6 | =+F4*F6 | =+G4*G6 | =+H4*H6 | =+I4*I6 | |
| Fixed cost | 50000 | 50000 | 50000 | 50000 | 50000 | 50000 | |
| Depreciation | 100000 | 100000 | 100000 | 100000 | 100000 | 100000 | |
| EBIT | =+D7-D8-D9-D10 | =+E7-E8-E9-E10 | =+F7-F8-F9-F10 | =+G7-G8-G9-G10 | =+H7-H8-H9-H10 | =+I7-I8-I9-I10 | |
| Tax@34% | =+D11*0.34 | =+E11*0.34 | =+F11*0.34 | =+G11*0.34 | =+H11*0.34 | =+I11*0.34 | |
| Net income | =+D11-D12 | =+E11-E12 | =+F11-F12 | =+G11-G12 | =+H11-H12 | =+I11-I12 | |
| Depreciation | =+D10 | =+E10 | =+F10 | =+G10 | =+H10 | =+I10 | |
| Operating cash flow | =+D14+D13 | =+E14+E13 | =+F14+F13 | =+G14+G13 | =+H14+H13 | =+I14+I13 | |
| Net working capital | -30000 | =-(D7*7.5%)-C16 |
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