Question

A company is launching a new product into the market. They have the following information:

• Customer survey costing $25,000 determined market interest.
• Project requires the purchase of $900,000 of equipment in 2019 (t = 0)
• Inventory will increase by $175,000 and accounts payable will rise by $75,000.
• All other working capital will stay the same, the net change in net operating working (NWC) is $100,000 at t = 0.
• Project will last for four years.
• Each unit will sell for $2 regardless of the year.
• Sales forecast units for 2020 of 2,685,000.
• They expect sales to decline by the following percent of the previous year’s sales units:
  • 2021 = - 3.166%
  • 2022 = - 2.885%
  • 2023 = - 2.970%
• The fixed cost of producing the product is $2,000,000 each year, and the variable cost of producing each unit will vary according to the following schedule: VC/per unit = $1.018 in 2020, $1.078 in 2021, $1.046 in 2022, and $1.221 in 2023.
• The company will use MACRS using the 3-year schedule of the following percentages (33, 45, 15, 7 % respectively), the CFO wants to see how value would change if it instead used the straight-line depreciation approach.
• Project will be complete in 2023 (t = 4), the company will salvage the equipment for $50,000 and that it will fully recover the NWC used in the beginning.
• The estimated tax rate is 40%.
• The project’s WACC is estimated to be 10%

Set-up a spreadsheet analysis for this example and calculate the listed variables for each choice of depreciation method. The analysis needs to be completed on a spread sheet.

1. NPV ?
2. IRR ?
3. Payback?
4. Discounted Payback?
5. MIRR (Modified Internal Rate of Return)?

Answer 1