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 8,200 in the first year, with growth of 6 percent each year for the next five years. Production of these lamps will require $47,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $107,000 per year, variable production costs are $14 per unit, and the units are priced at $42 each. The equipment needed to begin production will cost $187,000. 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 35 percent and the required rate of return is 23 percent. What is the NPV of this project?

NPV $

> I meant to hit the thumbs up! THANK YOU!!! Finally got the correct answer.

Answer 1

Answer:

NPV = $85,000.70

Working:

Year 1 2 4 ($187,000) Initial Investment Net Working Capital ($47,000) Units sold Growth rate 6% 6% 6% 6% 8,200 $344,400 Units sold 8692 9214 9766 10352 Sales Revenue (Units sold $42) $365,064 ($114,800) ($121,688) ($128,989) ($107,000) ($107,000)($107,000) ($37,400) $98,976 ($34,642) $64,334 $37,400 $101,734 $386,968 $410,186 ($136,729) ($107,000) ($37,400) $129,057 ($45,170) $83,887 $37,400 $121,287 $434,797 Variable Production cost (Units sold * $14) ($144,932) ($107,000) ($37,400) Fixed Cost ($37,400) $85,200 ($37,400) $113,579 ($39,752) $73,826 Depreciation $145,465 ЕBIT ($29,820) $55,380 $37,400 $92,780 ($50,913) $94,552 $37,400 $131,952 Tax at 35% EAT Add back depreciation Cash flow from operations $37,400 $111,226 Recovery of net working capital $47,000 ($234,000) $92,780 $101,734 $111,226 0.53738 $121,287 0.43690 $178,952 Cash flow PV factor (1/(1+23%)^ year 1 0.81301 0.66098 0.35520 ($234,000.00) $75,430.89 $67,244.63$59,771.10 $85,000.70 $52,990.09 $63,563.99 PV of cash flows NPV