VetVo Co. is considering making a new product. The new product is expected add $

Question

VetVo Co. is considering making a new product.  The new product is expected add $4.71 millions to the firm's sales and the expected costs are $1.08 millions.  The shareholders of VetVo requires 14% return and the corporate tax rate is 34 percent.  This project has three years life and requires $4.4 millions investment in fixed assets.  The fixed assets are classified as 3-year MACRS assets.  The expected salvage is $50,000.  There is no change in net working capital. a. Calculate the NPV of the project. b. Should the firm take the project?  State your reasons. Answer format: Round to two decimal places.  Do not use dollar sign or thousands separators.

Explanation / Answer

discount rate ( r) 14% TaxRate 34% Year(t) 0 1 2 3 Investment in equipment Investment 44,00,000 Total Sales (s= 47,10,000 47,10,000 47,10,000 Total cost (c= 10,80,000 10,80,000 10,80,000 MACRS rate rate 33.33% 44.45% 14.81% Depreciation d=rate*Investment 1466520.00 1955800.00 651640.00 EBIT EBIT=s-c-d 21,63,480 16,74,200 29,78,360 OperatingCashFlows,CFO EBIT*(1-TaxRate)+d 28,94,417 30,60,772 26,17,358 SalvageValue(MV) MV 50,000 Book Value(BV=Investment-Total Depreciation) BV=Investment-Total Depreciation 44,00,000 29,33,480 9,77,680 3,26,040 TerminalCF ,CFT MV-TaxRate*(MV-BV) 1,43,854 Initial Outlay,CFi (=-(Investment) -44,00,000 Net CashFlows/year , CF=CFO+CFT+Cfi -44,00,000 28,94,417 30,60,772 27,61,211 PV of Cash Flows, CF (=CF/(1+ r)^t) -4400000 2538962.105 2355164.666 1863738.91 NPV(Sum of above PVs) (Sum of above PVs) $      23,57,865.68

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