Winthrop Company has an opportunity to manufacture and sell a new product for a
ID: 2481566 • Letter: W
Question
Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a piece of equipment for $130,000. The equipment would have a useful life of five years and zero salvage value. It would be depreciated for financial reporting and tax purposes using the straight-line method. After careful study, Winthrop estimated the following annual costs and revenues for the new product: Annual revenues and costs: Sales revenues $ 250,000 Variable expenses $ 120,000 Fixed out-of-pocket operating costs $ 70,000 The company’s tax rate is 30% and its after-tax cost of capital is 15%.
What is the Net Present Value?
Explanation / Answer
Calculation of Net Present Value:
Now
Year 1
Year 2
Year 3
Year 4
Year 5
Sales revenues
$ 250,000.00
$ 250,000.00
$ 250,000.00
$ 250,000.00
$ 250,000.00
Less: Variable expenses
$ (120,000.00)
$ (120,000.00)
$ (120,000.00)
$ (120,000.00)
$ (120,000.00)
Less: Fixed out-of-pocket operating costs
$ (70,000.00)
$ (70,000.00)
$ (70,000.00)
$ (70,000.00)
$ (70,000.00)
Less: Depreciation =(130000 - 0) / 5
$ (26,000.00)
$ (26,000.00)
$ (26,000.00)
$ (26,000.00)
$ (26,000.00)
Formula : (Cost - Salvage value ) / Life years
Profit Before tax
$ 34,000.00
$ 34,000.00
$ 34,000.00
$ 34,000.00
$ 34,000.00
Less: Tax = (Profit before tax )*30%
$ (10,200.00)
$ (10,200.00)
$ (10,200.00)
$ (10,200.00)
$ (10,200.00)
Profit After tax
$ 23,800.00
$ 23,800.00
$ 23,800.00
$ 23,800.00
$ 23,800.00
Add: Depreciation
$ 26,000.00
$ 26,000.00
$ 26,000.00
$ 26,000.00
$ 26,000.00
Cash Flows After tax
$ 49,800.00
$ 49,800.00
$ 49,800.00
$ 49,800.00
$ 49,800.00
Less: Cost of Equipment
$ (130,000.00)
Net Cash Flows (CF)
$ (130,000.00)
$ 49,800.00
$ 49,800.00
$ 49,800.00
$ 49,800.00
$ 49,800.00
PVF (15%)
1.00000
0.86957
0.75614
0.65752
0.57175
0.49718
1/(1+15%)^0
1/(1+15%)^1
1/(1+15%)^2
1/(1+15%)^3
1/(1+15%)^4
1/(1+15%)^5
PV = CF*PVF =
$ (130,000.00)
$ 43,304.35
$ 37,655.95
$ 32,744.31
$ 28,473.31
$ 24,759.40
NPV = Sum of PVs =
$ 36,937.32
Calculation of Net Present Value:
Now
Year 1
Year 2
Year 3
Year 4
Year 5
Sales revenues
$ 250,000.00
$ 250,000.00
$ 250,000.00
$ 250,000.00
$ 250,000.00
Less: Variable expenses
$ (120,000.00)
$ (120,000.00)
$ (120,000.00)
$ (120,000.00)
$ (120,000.00)
Less: Fixed out-of-pocket operating costs
$ (70,000.00)
$ (70,000.00)
$ (70,000.00)
$ (70,000.00)
$ (70,000.00)
Less: Depreciation =(130000 - 0) / 5
$ (26,000.00)
$ (26,000.00)
$ (26,000.00)
$ (26,000.00)
$ (26,000.00)
Formula : (Cost - Salvage value ) / Life years
Profit Before tax
$ 34,000.00
$ 34,000.00
$ 34,000.00
$ 34,000.00
$ 34,000.00
Less: Tax = (Profit before tax )*30%
$ (10,200.00)
$ (10,200.00)
$ (10,200.00)
$ (10,200.00)
$ (10,200.00)
Profit After tax
$ 23,800.00
$ 23,800.00
$ 23,800.00
$ 23,800.00
$ 23,800.00
Add: Depreciation
$ 26,000.00
$ 26,000.00
$ 26,000.00
$ 26,000.00
$ 26,000.00
Cash Flows After tax
$ 49,800.00
$ 49,800.00
$ 49,800.00
$ 49,800.00
$ 49,800.00
Less: Cost of Equipment
$ (130,000.00)
Net Cash Flows (CF)
$ (130,000.00)
$ 49,800.00
$ 49,800.00
$ 49,800.00
$ 49,800.00
$ 49,800.00
PVF (15%)
1.00000
0.86957
0.75614
0.65752
0.57175
0.49718
1/(1+15%)^0
1/(1+15%)^1
1/(1+15%)^2
1/(1+15%)^3
1/(1+15%)^4
1/(1+15%)^5
PV = CF*PVF =
$ (130,000.00)
$ 43,304.35
$ 37,655.95
$ 32,744.31
$ 28,473.31
$ 24,759.40
NPV = Sum of PVs =
$ 36,937.32
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