Hoosier Camper, Inc. is a manufacturer of truck campers. Its current line of tru
ID: 2713442 • Letter: H
Question
Hoosier Camper, Inc. is a manufacturer of truck campers. Its current line of truck campers are selling excellently. However, in order to cope with the foreseeable competition with other similar truck campers, HC spent $950,000 to develop a new line of deluxe truck campers that are more spacious. In addition, the deluxe truck campers are much lighter with LED lighting, aerodynamic front nose-cap, a one-piece fiberglass wet bath, expansive storage in the cab and some other highend features. The company had also spent a further $250,000 to study the marketability of this new model. HC is able to produce the new model at a variable cost of $4,750 each. The total fixed costs for the operation are expected to be $2,850,000 per year. HC expects to sell 20,000 campers, 25,000 campers, 18,000 campus, 16,500 campers and 12,500 campers of the new deluxe model per year over the next five years respectively. They will be selling at a price of $18,000 each. To launch this new line of production, HC needs to invest $500,000,000 in equipment which will be depreciated on a seven-year MACRS schedule. The value of the used equipment is expected to be worth $1,250,000 as at the end of the 5 year project life. HC is planning to stop producing the existing model entirely in two years. Should HC not introduce the new deluxe model, sales per year of the existing model will be 12,000 campers and 10,000 campers for the next two years respectively. The existing model can be produced at variable costs of $3,260 each and total fixed costs of $1,450,000 per year. They are selling for $14,500 each. If HC produces the new deluxe model, sales of the existing model will be eroded by 5,000 campers for next year and 6,000 campers for the year after next. In addition, to promote sales of the existing model alongside with the new deluxe model, HC has to reduce the price of the existing model to $11,000 each. Net working capital for the new deluxe model will be 15 percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year 1 according to the sales of the year. HC is currently in the tax bracket of 35 percent and it requires a 14 percent returns on all of its projects.
What is the PI (profitability index) of the project?
What is the IRR (internal rate of return) of the project?
What is the NPV (net present value) of the project?
Explanation / Answer
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 14.29% 24.49% 17.49% 12.49% 8.93% Sale of deluxe campers 20,000 25,000 18,000 16,500 12,500 selling price 18,000 18,000 18,000 18,000 18,000 Variable cost 4,750 4,750 4,750 4,750 4,750 Contributionfrom new campers 265,000,000 331,250,000 238,500,000 218,625,000 165,625,000 Less Fixed cost (2,850,000) (2,850,000) (2,850,000) (2,850,000) (2,850,000) Net income from new campers 262,150,000 328,400,000 235,650,000 215,775,000 162,775,000 Old campers sales 7,000 4,000 selling price 11,000 11,000 Variable cost 3,260 3,260 Contributionfrom old campers 54,180,000 30,960,000 Less Fixed cost (1,450,000) (1,450,000) Net income from old campers 52,730,000 29,510,000 Total Net revenue from sales 314,880,000 357,910,000 235,650,000 215,775,000 162,775,000 Initial Investment (950,000) Marketibilty study (250,000) New Equipment (500,000,000) 1,250,000 Total Net revenue from sales 314,880,000 357,910,000 235,650,000 215,775,000 162,775,000 Depreciation (71,450,000) (122,450,000) (87,450,000) (62,450,000) (44,650,000) Total Pretax income 243,430,000 235,460,000 148,200,000 153,325,000 119,375,000 Tax @35% 85,200,500 82,411,000 51,870,000 53,663,750 41,781,250 Post Tax Income 158,229,500 153,049,000 96,330,000 99,661,250 77,593,750 Add back depreciation 71,450,000 122,450,000 87,450,000 62,450,000 44,650,000 Total Cash Inflow 229,679,500 275,499,000 183,780,000 162,111,250 122,243,750 Discounting Factor @14% 1 0.877 0.769 0.675 0.592 0.519 PV of Cash Flows (501,200,000) 201,473,246 211,987,535 124,046,265 95,982,874 63,489,573 NPV 195,779,493 PV of Cash Inflows 696,979,493 Net Investment 501,200,000 PI=PV of cash inflows/initial Investment = 1.39 Initial Investment (950,000) Marketibilty study (250,000) New Equipment (500,000,000) 1,250,000 Total Net revenue from sales 314,880,000 357,910,000 235,650,000 215,775,000 162,775,000 Depreciation (71,450,000) (122,450,000) (87,450,000) (62,450,000) (44,650,000) Total Pretax income 243,430,000 235,460,000 148,200,000 153,325,000 119,375,000 Tax @35% 85,200,500 82,411,000 51,870,000 53,663,750 41,781,250 Post Tax Income 158,229,500 153,049,000 96,330,000 99,661,250 77,593,750 Add back depreciation 71,450,000 122,450,000 87,450,000 62,450,000 44,650,000 Total Cash Inflow 229,679,500 275,499,000 183,780,000 162,111,250 122,243,750 Discounting Factor @14% 1 0.761 0.579 0.441 0.336 0.256 PV of Cash Flows (501,200,000) 174,834,056 159,634,820 81,060,569 54,428,749 31,242,492 NPV 687 At required return rate of 31.37%, the NPV becomes alomost 0. So IRR is 31.37%
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