3. BMT has developed a new product. It can go into production for an initial inv
ID: 2764195 • Letter: 3
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
Just need 4A 4B 4C
Thank you
Explanation / Answer
Sales(A)
VC(B)
FC(C)
Depreciation(D)
EBT(E)=
(A)-(B)-(C)-(D)
Tax@35%(F)
Operating Cash Flow(G)=(E)+(D)-(F)
Working Capital
Capital spending
Total Cash Flow
NPV
NPV
0
0
0
600000
0
0
800000
4400000
-5200000
-5200000
-5200000
1
3200000
1440000
600000
1100000
60000
21000
1139000
900000
239000
239000/1.08
221296.3
2
3600000
1620000
600000
1100000
280000
98000
1282000
1000000
282000
282000/1.08^2
241769.5
3
4000000
1800000
600000
1100000
500000
175000
1425000
1100000
325000
325000/1.08^3
257995.5
4
4400000
1980000
600000
1100000
720000
252000
1568000
0
1568000
1568000/1.08^4
1152527
Total
-3326412
This project is not profitable
Sales(A)
VC(B)
FC(C)
Depreciation(D)
EBT(E)=
(A)-(B)-(C)-(D)
Tax@35%(F)
Operating Cash Flow(G)=(E)+(D)-(F)
Working Capital
Capital spending
Total Cash Flow
NPV
NPV
0
0
0
600000
0
0
800000
4400000
-5200000
-5200000
-5200000
1
3200000
1440000
600000
1100000
60000
21000
1139000
900000
239000
239000/1.08
221296.3
2
3600000
1620000
600000
1100000
280000
98000
1282000
1000000
282000
282000/1.08^2
241769.5
3
4000000
1800000
600000
1100000
500000
175000
1425000
1100000
325000
325000/1.08^3
257995.5
4
4400000
1980000
600000
1100000
720000
252000
1568000
0
1568000
1568000/1.08^4
1152527
Total
-3326412
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