Question 4: Gillette had developed a new razor. The company was evaluating intro

Question

Question 4: Gillette had developed a new razor. The company was evaluating introducing the new product and had developed the following projections. Starting from year 6, Revenue, COGS, Op. Expenses will be the same as year 5, and go on forever. The project involves a $10,000,000 investment for a machine (in year 0) that is depreciated on a straight-line basis for 4 years (year 1 to year 4) to a salvage value of zero. The production will require a $2,000,000 initial (year 0) investment in net working capital. Only half of the working capital will be recovered in year 4. Calculate the NPV of the Gillette New Razor Project with a 15% OCC and 35% tax rate. (5 points)

Explanation / Answer

0 1 2 3 4 5 6+ Revenue 0 10000000 15000000 20000000 21000000 22050000 22050000 COGS 0 5000000 7500000 10000000 10500000 11025000 11025000 Operating epenses 0 2000000 2500000 3000000 3150000 3307500 3307500 Depreciation 0 2500000 2500000 2500000 2500000 0 0 Operating income before taxes 0 500000 2500000 4500000 4850000 7717500 7717500 Income tax @ 35% 0 175000 875000 1575000 1697500 2701125 2701125 Net operating income after tax 0 325000 1625000 2925000 3152500 5016375 5016375 Add: depreciation 0 2500000 2500000 2500000 2500000 0 0 Annual Operating cash flows 0 2825000 4125000 5425000 5652500 5016375 5016375 NPV: Annual operating cash flows 2825000 4125000 5425000 5652500 5016375 pvif @ 15% 0.8696 0.7561 0.6575 0.5718 0.4972 PV of operating cash flows 2456522 3119093 3567026 3231835 2494025 Sum of PV of annual cash flows - Year 1 to 5 14868500 PV of release of NWC in year 4 (1000000*0.5718) 571800 PV of continuing cash inflows [(5016375/0.15)*0.4972] 16627611 Sum of PV of cash inflows 32067911 Less: Initial investment (Machinery 10,000,000 + NWC 2,000,000) 12000000 NPV 20067911

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