3. BMT has developed a new product. It can go into production for an initial inv

Question

3. BMT has developed a new product. It can go into production for an initial investment of $4,400,000. The equipment will be depreciated using straight-line depreciation over 4 years to a value of zero. The firm believes that net working capital at each date will equal 25 percent of next year’s forecast sales. The firm estimates that variable costs are equal to 40% of sales and fixed costs are $600,000 per year. Sales forecasts in dollars are below. The project will come to an end after 4 years, when the product becomes obsolete. The firm’s tax rate is 35 percent, and the discount rate is 9 percent. Calculate the NPV.

            Year                 0          1                   2                    3                  4  

Sales forecast (in $): 0    3,200,000     3,600,000      4,000,000      4,400,000      

4. In problem 3, perform scenario analysis by assuming the following changes take place at the same time. Find the revised NPV.

            (a) sales are 10% lower each year than predicted above

            (b) the discount rate is 8 percent

            (c) variable costs are 45% of sales

Explanation / Answer

Year 0 1 2 3 4 initial invst     (4,400,000) Sales          3,200,000          3,600,000          4,000,000          4,400,000 Variable cost          1,280,000          1,440,000          1,600,000          1,760,000 Contribution          1,920,000          2,160,000          2,400,000          2,640,000 fixed cost 600,000 600,000 600,000 600,000 Depreciation          1,100,000          1,100,000          1,100,000          1,100,000 PBT              220,000              460,000              700,000              940,000 Tax                77,000              161,000              245,000              329,000 PAT              143,000              299,000              455,000              611,000 ADD: Dep          1,100,000          1,100,000          1,100,000          1,100,000 Cashflow          1,243,000          1,399,000          1,555,000          1,711,000 DF 1 0.91743 0.84167 0.77218 0.70842 DCF     (4,400,000)    1,140,365.49    1,177,496.33    1,200,739.90    1,212,106.62 NPV           330,708 Year 0 1 2 3 4 initial invst (4,400,000) Sales      2,880,000      3,240,000          3,600,000          3,960,000 Variable cost      1,296,000      1,458,000          1,620,000          1,782,000 Contribution      1,584,000      1,782,000          1,980,000          2,178,000 fixed cost 600,000 600,000 600,000 600,000 Depreciation      1,100,000      1,100,000          1,100,000          1,100,000 PBT       (116,000)            82,000              280,000              478,000 Tax          (40,600)            28,700                98,000              167,300 PAT          (75,400)            53,300              182,000              310,700 ADD: Dep      1,100,000      1,100,000          1,100,000          1,100,000 Cashflow      1,024,600      1,153,300          1,282,000          1,410,700 DF 1 0.92592 0.85733 0.79383 0.73502 DCF (4,400,000)    948,697.63    988,758.69    1,017,690.06    1,036,892.71 NPV       (407,961)

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

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