Connect Account Downloads Mal cbutterman@liberty.edu ? https:// tml in Chapter 9

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Connect Account Downloads Mal cbutterman@liberty.edu ? https:// tml in Chapter 9 6 Help Save& Exit Submit Check my work 9 Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $63 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $672,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $170 per trap and believes that the traps can be sold for $7 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35% and the required rate of return on the project is 9%. Use the MACRSdeprecationschedule. points Sales (m:11ions of traps) o.s o.70.8 0.8 ?.7 0.5 References a. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places) NPV $(5.639 0000 mlion b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (Do not round intermediate colculations. Enter your answer in whole dollars not in millions.) The NPV increases by S11101 9of15 ill Next >

Explanation / Answer

ANS CALCULATION OF NET PRESENT VALUE  

1. Calculation Of Revenues , Cost Of Production and Depreciation

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6  

a. Sales (Qty In Mill) 0.5 0.7 0.8 0.8 0.7 0.5

b. Sales In Fig 5 Lakhs 7 Lakhs 8 Lakhs 8 Lakhs 7 Lakhs 5 Lakhs

c. Cost Per Unit $1.70       $1.70     $1.70     $1.70    $1.70     $1.70

d. Cost Of Production 8.5 Lakhs 11.9 Lakhs 13.6 Lakhs 13.6 Lakhs 11.9 Lakhs 8.5 Lakhs

(b*c)

e. Selling Price Per Unit $7.00 $7.00    $7.00    $7.00   $7.00   $7.00

f. Revenues (e*b) 35 Lakhs 49 Lakhs 56 Lakhs 56 Lakhs 49 Lakhs 35 Lakhs

g. Depreciation 10.5 Lakhs 10.5 Lakhs 10.5 Lakhs 10.5 Lakhs 10.5 Lakhs 10.5 Lakhs

(6300000/6) PER Year Dep

2. WORKING CAPITAL ANALYSIS

A. WORKING CAPITAL REQUIREMENT   (FIG IN LAKHS)

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

1. Sales 0 35 49 56 56 49 35

2. WC Required 0 3.5 Lakhs 4.9 Lakhs 5.6 Lakhs 5.6 Lakhs 4.9 Lakhs 3.5 Lakhs

( Sales*10%)

3. Net Inflow /Outflow 3.5 Lakhs 1.4 Lakhs 0.7 Lakhs 0 (0.7 Lakhs ) (1.4 Lakhs)

(In Calculation Of Net Inflows/Outflows Inflows Have Been Denoted In ( ) )

3. CALCULATION OF PRESENT VALUE OF CASH INFLOWS

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

a. Revenue 35 Lakhs 49 Lakhs 56 Lakhs 56 Lakhs 49 Lakhs 35 Lakhs

b. Cost Of Production  8.5 Lakhs 11.9 Lakhs 13.6 Lakhs 13.6 Lakhs 11.9 Lakhs 8.5 Lakhs

c. Depreciation   10.5 Lakhs 10.5 Lakhs 10.5 Lakhs 10.5 Lakhs 10.5 Lakhs 10.5 Lakhs

e. Profit Before Tax 16 Lakhs 26.6 Lakhs 31.9 Lakhs 31.9 Lakhs 26.6 Lakhs 16 Lakhs

(a-b-c)

f. Corporate Tax 5.6 Lakhs 9.31 Lakhs 11.165 Lakhs 11.165 Lakhs 9.31 Lakhs 5.6 Lakhs

(35% *e)

g. Profit After Tax 10.4 Lakhs 17.29 Lakhs 20.74 Lakhs 20.74 Lakhs 17.29 Lakhs 10.4 Lakhs

(e-f)

h. Cash Inflows 20.9 Lakhs 27.79 Lakhs 31.24 Lakhs 31.24 Lakhs 27.79 Lakhs 27.79 Lakhs

(g+c)

i. Cash Inflows From 4.368 Lakh

Equipment Sale

(672000*0.65(Net Of Tax) In Year 6

j. Working Capital Inflows 0.7 Lakhs 1.4Lakhs

k. Total Cash Inflows (h+i+j) 20.9 Lakhs 27.79 Lakhs 31.24 Lakhs 31.24 Lakhs 28.49 Lakhs 33.56Lak

l. Discounting Factor (@9%) 0.917 0.842 0.772 0.708 0.650 0.596

J. Present Value Of Inflows 19.16 23.40 14.91 2.118 18.52 20.00

h. Total Present Value Of Inflows (Total Of J ) = $ 98.108 Lakhs

4. CALCULATION OF PRESENT VALUE OF CASH OUTFLOWS

A. INITIAL OUTFLOW = $ 6.3 Millions = $63 Lakhs

B. Present Value Of Working Capital Outflows (FIG IN Lakh $ )

Outflows Discounting Factor Present Value Of Outflows

a. Year 1 3.5 0.917 3.5*0.917= 3.21

b. Year 2 1.4 0.842 1.4*0.842=1.18

c. Year 3 0.7 0.772 0.7*0.772=0.54

Total(a+b+c)= 4.93 Lakhs

C. Present Value Of Cash Outflows (A+B) = 4.93+63 = 67.93 Lakhs

  

5. Calculation Of Net Present Value (DISCOUNTING RATE 9 %)

A. Present Value Of Cash Inflows (Year1 To Year 6 )= 98.108 Lakhs

B. Presne Value Of Cash Outflows = 67.93 Lakhs

C. NET PRESENT VALUE (A-B) = 30.178 Lakhs

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