You are evaluating a project for ‘The Ultimate’ recreational tennis racket, guar

Question

You are evaluating a project for ‘The Ultimate’ recreational tennis racket, guaranteed to correct a wimpy backhand. You estimate the sales price of ‘The Ultimate’ to be $200 and sales volume to be 1,500 units the 1st year, 2,250 units the 2nd year and 3,500 units in year 3. The project has a 3-year life. Variable costs amount to $125 per unit and fixed costs are $80,000 per year. The project requires $100,000 of equipment that is depreciated using the 5-year MACRS schedule. The actual market value of the equipment at the end of year 3 is $45,000. Initial net working capital investment is $40,000 and NWC will maintain a level equal to 25% of sales during the first two years of the project. There is no increase in year 3 of the project. The tax rate is 34% and the required return on the project is 10%.

What is the NPV of this project? (Show procedure)

Explanation / Answer

NPV is based on the factors given below : Initial investment = $ 100,000 Year 0 NWC Investment (yearwise) (Values in $) Year 0 40000 Year 1 75000 Year 2 112500 Net Profits from Year 1 to Year 3 (All values in $) Sales Variable Fixed Depreciation Tax@ Profit Costs Costs 34% post tax Year 1 300000 187500 80000 20000 4250 8250 Year 2 450000 281250 80000 20000 23375 45375 Year 3 700000 437500 80000 20000 55250 107250 Depreciation is worked out as under Project Cost 100000 MACRS Depreciation 5 years Depreciation per year 20000 Market value of equipment at the end of year 3 is $ 45,000 Considering all these factors, the NPV of the project works out to -1,42,892.30

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.