Question

Given: vestment: $125,000 Project life: 5 years Self at end of project:$50,000 rouct Selling Price: $10 Labor: $2.00 Material: $1.20 Overhead: $0.80 Annual units sold: 10,000 Working Capital: Finished Goods Inventory: 2 Months Raw Material inventory: 1 Month Accounts Payable:30 Da Accounts Recelvables: 60 days eoreclation method: 7-year MACRS Income tax rate: 40% MARR: 15% □ Find: Determine the project cash flows, Working Capital,ARR, and NPV

Answer 1

Project cash flows

Year	1	2	3	4	5
Annual Units sold	10,000	10,000	10,000	10,000	10,000
Product selling price	10	10	10	10	10
Revenue	1,00,000	1,00,000	1,00,000	1,00,000	1,00,000
Production cost
Labour (@ $2 per unit)	20,000	20,000	20,000	20,000	20,000
Material (@ $1.2 per unit)	12,000	12,000	12,000	12,000	12,000
Overhead (@ $0.8 per unit)	8,000	8,000	8,000	8,000	8,000
Total Production cost	40,000	40,000	40,000	40,000	40,000
Net Profit	60,000	60,000	60,000	60,000	60,000
Sell at end of project					50,000

Working capital cycle= Inventory days +Receivable days- Payable days=60 days+30 days+60 days-30 days= 120 days

Working capital cycle= 120 days

MACRS Depreciation for 7 year is done below:

Year 1=125,000*14.29%=17,863

Year 2=125,000*24.49%=30,613

Year 3=125,000*17.49%=21,863

Year 4=125,000*12.49%=15,613

Year 5=125,000*8.93%= 11,163

Net present Value determined as below:

Year	0	1	2	3	4	5
Investment	-1,25,000
Annual Units sold		10,000	10,000	10,000	10,000	10,000
Product selling price		10	10	10	10	10
Revenue		1,00,000	1,00,000	1,00,000	1,00,000	1,00,000
Production cost
Labour		20,000	20,000	20,000	20,000	20,000
Material		12,000	12,000	12,000	12,000	12,000
Overhead		8,000	8,000	8,000	8,000	8,000
Total Production cost		40,000	40,000	40,000	40,000	40,000
Net Profit Before depreciation		60,000	60,000	60,000	60,000	60,000
Depreciation expense		17,863	30,613	21,863	15,613	11,163
Net income after depreciation		42,138	29,388	38,138	44,388	48,838
Tax expense		16,855	11,755	15,255	17,755	19,535
Net income depreciation and tax		25,283	17,633	22,883	26,633	29,303
Net cash flow		43,145	48,245	44,745	42,245	40,465
Sell at end of project						50,000
Total cash flow including sell at end off project		43,145	48,245	44,745	42,245	90,465
Discounting factor at 15%		0.87	0.76	0.66	0.57	0.50
Present value of cash flows	-1,25,000	37,517	36,480	29,421	24,154	44,977
Net present value	47,549

IRR is 12%.

Thanks