a. | What is the profitability index of the project? | |||||||||
1.30 | ||||||||||
b. | What is the IRR of the project? | |||||||||
28.31% | ||||||||||
c. | What is the NPV of the project? | |||||||||
$ 18,096,790.85 | ||||||||||
d. |
How sensitive is the NPV to changes in the price of the new PDA? |
|||||||||
e. | How sensitive is the NPV to changes in the quantity sold? | |||||||||
I want to make sure a b and c are correct and need d and e
Equipment | 32500000 | ||||
Pretax salvage value | 3500000 | ||||
R&D | 750000 | ||||
Marketing study | 200000 | ||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Sales (units) | 65000 | 82000 | 108000 | 94000 | 57000 |
Depreciation rate | 14.29% | 24.49% | 17.49% | 12.49% | 8.93% |
Price | 500 | ||||
VC | 215 | ||||
FC | 4300000 | ||||
Tax rate | 35.00% | ||||
NWC percentage | 20.00% | ||||
Required return | 12.00% | ||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Sales | 32500000 | 41000000 | 54000000 | 47000000 | 28500000 |
Less: VC | 13975000 | 17630000 | 23220000 | 20210000 | 12255000 |
Less: Fixed costs | 4300000 | 4300000 | 4300000 | 4300000 | 4300000 |
Less: Dep | 4644250 | 7959250 | 5684250 | 4059250 | 2902250 |
EBT | 9580750 | 11110750 | 20795750 | 18430750 | 9042750 |
Less: Tax | 3353262.5 | 3888762.5 | 7278512.5 | 6450762.5 | 3164962.5 |
NI | 6227487.5 | 7221987.5 | 13517237.5 | 11979987.5 | 5877787.5 |
+Dep | 4644250 | 7959250 | 5684250 | 4059250 | 2902250 |
OCF | 10871737.5 | 15181237.5 | 19201487.5 | 16039237.5 | 8780037.5 |
NWC | |||||
Beg | 0 | 6500000 | 8200000 | 10800000 | 9400000 |
End | 6500000 | 8200000 | 10800000 | 9400000 | 0 |
NWC CF | -6500000 | -1700000 | -2600000 | 1400000 | 9400000 |
Net CF | 4371737.5 | 13481237.5 | 16601487.5 | 17439237.5 | 18180037.5 |
Salvage | 3500000 | ||||
BV of equipment = Cost of Equipment - Depreciation) | 7250750 | ||||
Taxes (BV - MV) x Tax Rate | 1312762.5 | ||||
Salvage CF = $4,100,000 + 243,827.50) | 4812762.5 | ||||
a) | |||||
Time | Cash flow | Cumulative Cash Flow | |||
0 | -32500000 | -28128263 | |||
1 | 4371737.5 | -23756525 | |||
2 | 13481237.5 | -10275288 | |||
3 | 16601487.5 | 6326200 | |||
4 | 17439237.5 | 23765437.5 | |||
5 | 22992800 | ||||
Payback period = | 2.619 | Years | |||
b) | |||||
Time | Cash flow | PV @ 12% | Present Value | ||
1 | 4371737.5 | 0.8929 | 3903337.05 | ||
2 | 13481237.5 | 0.7972 | 10747160 | ||
3 | 16601487.5 | 0.7118 | 11816610.9 | ||
4 | 17439237.5 | 0.6355 | 11082950.7 | ||
5 | 22992800 | 0.5674 | 13046732.2 | ||
Total | 50596790.9 | ||||
Profitability Index = (PV of future cash flows) ÷ Initial investment | |||||
Profitability Index = | 1.56 | ||||
c) & d) | Time | Cash flow | PV @ 12% | Present Value | |
0 | -32500000 | 1.0000 | -32500000 | ||
1 | 4371737.5 | 0.8929 | 3903337.05 | ||
2 | 13481237.5 | 0.7972 | 10747160 | ||
3 | 16601487.5 | 0.7118 | 11816610.9 | ||
4 | 17439237.5 | 0.6355 | 11082950.7 | ||
5 | 22992800 | 0.5674 | 13046732.2 | ||
IRR | c) | 28.31% | NPV | 18096790.9 | d) |
e) | |||||
How sensitive is the NPV to changes in the price of the new PDA? | |||||
Price per unit | NPV | Sensitivity of NPV to price | |||
Decrease $10 | 16252169.3 | 184462.157 | |||
Neutral | 18096790.9 | 0 | |||
Increase $10 | 19941412.4 | 184462.157 | |||
For a $10 change in price of the new SMART PHONE, the NPV of the project changes $184462.157 in the same direction |
f) | ||
Units | NPV | Sensitivity of NPV to units sold |
Decrease 100 units per year | $ 16,190,923.12 | $ (19,058.68) |
Neutral | $ 18,096,790.85 | 0 |
Increase 100 units per year | $ 20,002,658.58 | $ 19,058.68 |
For a one unit per year change in quantity sold of the new SMART PHONE, the NPV of the project changes $19058.68 in the same direction. |
a. What is the profitability index of the project? 1.30 b. What is the IRR of the proje...
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