The following table presents sales forecasts for Golden Gelt Giftware. The unit

Question

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $50. The unit cost of the giftware is $30.

Year Unit Sales

1. 31,000

2. 39,000

3. 13,000

4. 7,000

Thereafter 0

It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (year-0) investment in working capital of .20 × 31,000 × $50 = $310,000. Plant and equipment necessary to establish the Giftware business will require an additional investment of $209,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the equipment will have an economic and book value of zero. The firm’s tax rate is 40%.

What is the net present value of the project? The discount rate is 14%. (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Net present value $_______?

Explanation / Answer

Depreciation:

Cash flows per year:

NPV = $431123

Year Depreciation rate Depreciation $ 1 33.33% 69659.70 2 44.45% 92900.50 3 14.81% 30952.90 4 7.41% 15486.90

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