1. 18 pts] Based on a recent market study which detector system in order to elim

Question

1. 18 pts] Based on a recent market study which detector system in order to eliminate cockroaches. The ex three years $50,000, a firm intends to launch a new laser ate cockroaches. The expected sales are the following for the next Year Units Sold 1 53,000 2 86,000 3 46,000 The sales price of th in net working capital (NWC) of $10,000 at the launch of t equal to 20% of the total sal e new system is estimated at $95 per unit. This new project will require an increase he project (t-0), and the NWC will then be es of the firm for the following years except for the last year (t-3) where l be zero. The variable cost per unit is estimated at $60 and there are annual fixed costs of 25,000. This project requires an initial investment (machine) of $2,500,000 which can be depreciated on a linear basis over 5 years. At the end of the project in year 3, the machine can be sold for 30% of e purchase price. The company's income and capital gains are taxed at a rate of 40%, and the quired rate of return by investors is 20%. Compute theNPVofthe project.

Explanation / Answer

Revenue: Units Price Total Year 1 53000 95 5035000 Year 2 86000 95 8170000 Year 3 46000 95 4370000 Variable Cost: Units Price Total Year 1 53000 60 3180000 Year 2 86000 60 5160000 Year 3 46000 60 2760000 Depreciation: Investment 2500000 Salvage Value 30% of 2500000 750000 Useful Life 5 Dep (2500000-750000)/5 350000 Total Operating Cost Variable Fixed Total Year 1 3180000 25000 3205000 Year 2 5160000 25000 5185000 Year 3 2760000 25000 2785000 Working Capital: Year 0 10000 Year 1 20% of 5035000 1007000 Year 2 20% of 8170000 1634000 Year 3 0 CF = net income + depreciation = (1 - tax rate)(Revenue - total operating costs) + depreciation = Year 1 =(1-.40)(5035000-3205000)+350000 1448000 Year 2 =(1-.40)(8170000-5185000)+350000 2141000 Year 3 =(1-.40)(4370000-2785000)+350000 1301000 Cash Flow Year 0 2500000+10000 -2510000 Year 1 1448000+1007000   2455000 Year 2 2141000+1634000 3775000 Year 3 1301000 1301000 At 20%, NPV -2510000+2455000/1.2+3775000/1.22+1301000/1.23 2425212.19

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