3. BMT has developed a new product. It can go into production for an initial inv
ID: 2765137 • 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.
Sales forecast (in $): Year 1 (3,200,000) Year 2 (3,600,000) Year 3 (4,000,000) Year 4 (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
Please answer 4 a, b, and c seperately
Explanation / Answer
3. The NPV is aclaulted as follows:
NPV = $101,321.67
4.a When Sales are 10% lower, the NPV is:
4.b. When the discount rate is 8%
4.c When the variable costs are 45% of sales
Year 0 1 2 3 4 Initial Investment -4400000 Sales 3200000 3600000 4000000 4400000 Variable costs -1280000 -1440000 -1600000 -1760000 Fixed Costs -600000 -600000 -600000 -600000 Net Working capital -800000 -900000 -1000000 -1100000 0 Depreciation -1100000 -1100000 -1100000 -1100000 Profit before tax -5200000 -680000 -540000 -400000 940000 Taxes 0 0 0 -329000 Net Income -5200000 -680000 -540000 -400000 611000 Add back depreciation 1100000 1100000 1100000 1100000 Return of Working Capital 3800000 Net Cash flow -5200000 420000 560000 700000 5511000 NPV $ 101,321.67Related Questions
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