company has the following estimated Information regarding a new project: • Unit

Question

company has the following estimated Information regarding a new project:

• Unit sales: 20,000 per year

• Price per unit: $16

• Variable costs per unit: $5

• Fixed costs = $60,000

• Depreciation expense: $40,000 (per year)

• Tax rate : 40%

The new project will need an initial investment in fixed assets of $400,000 and a change in net working capital of $60,000 , which will be returned back at the end of the project. If the required rate of return is 15%. Should we accept the project or not? Why?

can you show me the steps

Explanation / Answer

Ans-

initial investment $400,000

Depreciation expense $40,000 p.a

So period of the project 10 years

Calculation of NPV

We should accept the project because NPV is positive $162105.6

note-while calculation of NPV working capital is not taken because it is return after at the end of the project

Sales 20000 Unit Price per unit $ 16 Less-variable cost $ 5 Contribution/Unit $ 11 Total Contribution $ 220000 Less-fixed cost $ 60000 Less-depreciation $ 40000 EBT $ 120000 Less-tax @40% $ 48000 EAT $ 72000 CASH INFLOW(EAT +DEP) $ 112000

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