sales price of Tiffinay is $400 per unit sales volume 1000 units year 1 1400 yea

Question

sales price of Tiffinay is $400 per unit
sales volume 1000 units year 1
                      1400 year 2
                      1200 year 3
project has a three year life
variable cost 200 per unit
fixed cost 120000
initial investment of 180000
end of year three actuall market value is 30000
tax rate is 30%
required return om the project is 10%

I'm gwtting the wrong answer for NPV

t. You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You ostimate the sales price of The Tiff-any to be $400 per unit and sales volune to be 1, 000 units in year 1: 1, 400 units in year 2; and 1,200 units in year 3. The pro ject has a three year lifo. Variable costs amount to $200 per unit and fixed costs are $120, 000 per rear. The project requires an initial investuent of $180, 000 in assets that will be dopreciated straight-line to zero over the three-year project life. The aetual market value of these assets at the end of year 3 is expected to be $30,000. NWC requirements at the beginning of project vil be $100, 000 and recovered at end of year 3. The tax rate is 30 percent and the required return on the project is 10 percent. What are the cash flows for s 0, 1, 2 and 3 for the project? Calculate NPV and Internal rate of return for this year project. Should it be undertaken?

Explanation / Answer

Calculation of present value of cash outflows Particulars Amount Year PV factor @10 % Present value Initial investment 180000 0 1 180000 LESS : Scrap value(after tax) 21000 3 0.751 -15771 Total 164229 Calculation of present value of cash inflows Particulars Year1 Year2 Year3 Sales 400000 560000 480000 LESS: Variable cost 200000 280000 240000 Fixed cost 120000 120000 120000 Depreciation 60000 60000 60000 Profit before tax 20000 100000 60000 Less: tax 6000 30000 18000 Profit after tax 14000 70000 42000 ADD: depreciation 60000 60000 60000 Cash inflow 74000 130000 102000 PV factor @ 10 % 0.909 0.826 0.751 Present value of cash inflow 67266 107380 76602 Total cash inflow for 3 years 251248 NPV = PVCI - PVCO = 251248 - 164229= 87019

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