Question

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a "surf lifestyle for the home." With limited capital, they decided to focus on surf print table and floor lamps to accent people's homes. They projected unit sales of these lamps to be 9,000 in the first year, with growth of 7 percent each year for the next five years. Production of these lamps will require $55,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $115,000 per year, variable production costs are $24 per unit, and the units are priced at $52 each. The equipment needed to begin production will cost $195,000 The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 40 percent and the required rate of return is 25 percent. What is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) bok NPV ences

Answer 1

	0	1	2	3	4	5	6
Capital expenditure	$          -1,95,000
Change in NWC	$             -55,000						55000
Op CF:
Sales in units		9000	9630	10304	11025	11797	12623
Sales		$ 4,68,000	$ 5,00,760	$   5,35,813	$   5,73,320	$    6,13,453	$   6,56,394
Variable cost		$ 2,16,000	$ 2,31,120	$   2,47,298	$   2,64,609	$    2,83,132	$   3,02,951
Fixed cost [other than depreciation]		$ 1,15,000	$ 1,15,000	$   1,15,000	$   1,15,000	$    1,15,000	$   1,15,000
Depreciation [195000/5]		$     39,000	$     39,000	$      39,000	$       39,000	$       39,000	$       39,000
NOI		$     98,000	$ 1,15,640	$   1,34,515	$   1,54,711	$    1,76,321	$   1,99,443
Tax at 40%		$     39,200	$     46,256	$      53,806	$       61,884	$       70,528	$       79,777
NOPAT		$     58,800	$     69,384	$      80,709	$       92,827	$    1,05,792	$   1,19,666
Add: Depreciation		$     39,000	$     39,000	$      39,000	$       39,000	$       39,000	$       39,000
Operating cash flow		$     97,800	$ 1,08,384	$   1,19,709	$   1,31,827	$    1,44,792	$   1,58,666
Free CFs	$          -2,50,000	$     97,800	$ 1,08,384	$   1,19,709	$   1,31,827	$    1,44,792	$   2,13,666
PVIF at 25%	1	0.80000	0.64000	0.51200	0.40960	0.32768	0.26214
PV at 25%	$          -2,50,000	$     78,240	$     69,366	$      61,291	$       53,996	$       47,446	$       56,011
NPV	$           1,16,350