Question

2. Suppose you are considering a new project for your firm. The project is expected to run for five years The end deliverable for the project is that it produces a widget. The widget is expected to be brand new to the market and, as such, will have great demand at first. That demand wll die away as competition enters the market. The firm projects the following price points and units sold for each of the five years Xear rice per unit m ber of units sO 20, 18 16,000 15 II,o00 6,000 10 ,000 Costs of goods sold are expected to be 40% of sales. Initially, the project requires the purchase of two very large machines. The first has a cost of S180,000, while the second costs $120,000. Both will be fixed assets to the firm, and wl be depreciated as MACRS three-year property classes. In addition, the project will require an increase in NWC of S150,000, which cannot be depreciated. Both machines will be sold at the end of the project and are expected to have a selling price of $90,000 (combined) at that time, 25% of the change in NWC can be recovered at the end of the project. Taxes are 35%. You may round to the nearest dllar throughout. If the project's k = 8%, what is the NPV of the project? (20 pts) a. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 NCF NPV: If the project's k-8%, what is the profitability index of the project? (10 pts) b.

Answer 1

year	0	1	2	3	4	5
investment in machines	-300000
investment in working capital	-150000
Units sold		20000	16000	11000	6000	3000
selling price per unit		24	18	15	13	10
total sales revenue		480000	288000	165000	78000	30000
less variable expense-40% of sales revenue		192000	115200	66000	31200	12000
less depreciation		99990	133350	44430	22230
operating profit		188010	39450	54570	24570	18000
after tax profit = operating profit*(1-tax rate) tax rate = 35%		99990	133350	44430	22230	11700
depreciation		133320	177800	59240	29640
after tax sale proceeds of machine = 90000*(1-.35)						58500
recovery of working capital = 150000*25%						37500
net cash flow = after tax profit+depreciation+after tax sale proceeds+recovery of working capital	-450000	233310	311150	103670	51870	107700
NPV at 8% = Using NPV function in MS excel	NPV(8%,F1093:J1093)+E1093	226510.1489
PI = 1+(NPV/Initial Investment)	1+(226510.1489/450000)	1.50
Year	cost of machine(both machines)	MACRS rate	Annual depreciation
1	300000	33.33%	99990
2	300000	44.45%	133350
3	300000	14.81%	44430
4	300000	7.41%	22230

New Microsoft Off Microsoft Exce ce Excel Worksheet Home Insert Page Layout Formulas Data Review View ー-=砂,1 ョwrap Tent A'a" Calibri 11 General Sort & Find & Format Painter B Lu Formatting as Table Styles Styles Editing Document Recovery 1080 vear 1081 investment in machines Excel has recovered the following fles, Save the ones you wish to keep. 1082 investment in working capita 1083 Units sold selling price per unit S total sales revenue 1086 less variable expense-40% of sales revenue Available files 屆 1084 New Microsoft Office Excel w New Micosoft Office Excel W....* .. Version created from the last... 165000 2:25 PM Wednesday, May 22, 115200 192000 31200 1087 less depreciation 133350 New Marosoft Office Excel ...1088 operoting profit Version created last tme the 188010 54570 after tax profit = operating profit"(1-tax 5:30 AM Monday, January 01 11089|rate) tax rate:35% 22230 133350 11700 133320 177800 New Microsoft Office Excel W... Version created from the last... tax sale proceeds of machine = 58500 7:50 AM Friday, May 24, 2019 recovery of working capital 1092150000"2596 New Microsoft Office Excelw... Version created last tme the net cash flow- after tax profit-depreciation+after tax sale 5:30 AM Monday, January 01... 311150 1093 proceedstrecovery of working copital NPV at 8% Using NPV function in MS 233310 103670 51870 107700 New Micosoft Office Excel W... NPV(8%,F 109311093)-E1093 1+H226510.1489/450000) 226510.1489 Version created from the last... 1095 PI1+NPV/initial Investment 4:18 PM Saturday, May 18,2 cost of machine(both machind MACRS rate Annual depreciation 33.33% 44.45% 133350 44430 Which file do I want to save? Close 1101 144 ト Sheet16 Sheet17 Sheet18 Sheet19 Sheet20 Sheet21 Sheet22 Sheet23 ,00'0% Select destination and press ENTER or choose Paste Average: 6361135628 Count 94 surm: 4580017.652 7:12 AM