d.)Your mother really dislikes the low quality of T-shirts that your company mak
ID: 2761758 • Letter: D
Question
d.)Your mother really dislikes the low quality of T-shirts that your company makes. She also dislikes the low-brow sayings and tasteless pictures that you print on them - she won’t let your younger sister wear them. Thus, your mom has been pestering you to expand and produce a higher quality line of T-shirts in addition to your current selection. Below are the details on this project.
Cost of new equipment: $80,000
Installation cost of equipment: $40,000
Life of equipment: 5 years, Straight line depreciation
Expected sales: $170,000 per year
Expected reduction in sales of cheap T-shirts as your few sober customers will probably shift to the new line: $10,000 per year
Raw material cost: $90,000 per year
New worker salary: $20,000 per year
Required Net working capital over the life of the project: $20,000
Expected Salvage value of equipment at the end of 5 year: $30,000
Tax rate: 35%.
Assuming a WACC of 16%, what is this project’s NPV?
4,501
16,742
-2,068
19,391
12,725
e.)Assume that you have 40 years until retirement and have just started your first job. Once you retire, you anticipate that you will live for 30 additional years. Assume that you will require $100,000 per year to support yourself in retirement. All investments that you make will go into and stay in an account that returns 6% per year (i.e. however much you have at retirement will sit in that account and continue to accrue interest on the remaining balance.) How much will you have to save each year over the next 40 years to meet your goal? Assume that your first investment occurs at the end of your first year of work (yr 1) and that the last of your 40 investments occurs on the last day that you are employed (yr 40). For simplicity, assume that your first withdrawal is at the end of your first retirement year (yr 41).
a.4,501
b.16,742
c.-2,068
d.19,391
e.12,725
Explanation / Answer
Answering the e part
First we should find the present value of the amount required at the start of retireement
PMT =100,000
r=6%
N=30
PV=?
PV(6%,30,-100000,0,0) =1376483.12
Now we know hou much he would have at retirement
Calclating the amount to saved for forty years so that it become 1376483.12
FV =1376483.12
PMT=?
Rate =6%
N=40
=PMT(6%,40,0,1376483.12,0)
=8894.20
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