With the growing popularity of casual surf print clothing, two recent MBA gradua

Question

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps to accent people’s homes. They projected unit sales of these lamps to be 8,600 in the first year, with growth of 8 percent each year for the next five years. Production of these lamps will require $51,000 in networking capital to start. Total fixed costs are $111,000 per year, variable production costs are $24 per unit, and the units are priced at $52 each. The equipment needed to begin production will cost $191,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 35 percent, and the required rate of return is 25 percent. What is the NPV of this project?(Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Statemnet showing Cash flows Particulars Time PVf@25% Amount PV Cash Outflows                            -                   1.00      (191,000.00)    (191,000.00) Cash Outflows WC                          -                   1.00        (51,000.00)      (51,000.00) PV of Cash outflows    (242,000.00) Cash inflows                     1.00            0.8000           97,740.00         78,192.00 Cash inflows                     2.00            0.6400        105,566.00         67,562.24 Cash inflows                     3.00            0.5120        113,783.30         58,257.05 Cash inflows                     4.00            0.4096        122,411.47         50,139.74 Cash inflows                     5.00            0.3277        131,471.04         43,080.43 Cash inflows(WC)                     5.00            0.3277           51,000.00         16,711.68 PV of Cash Inflows      313,943.14 NPV         71,943.14 Year                     1.00                 2.00                     3.00                   4.00                 5.00 Unit Sales             8,600.00        9,030.00             9,481.50           9,955.58      10,453.35 Sales price                   52.00              52.00                   52.00                 52.00              52.00 Variable costs                     24.00              24.00                   24.00                 24.00              24.00 Cont per unit                   28.00              28.00                   28.00                 28.00              28.00 Total Cont        240,800.00    252,840.00        265,482.00      278,756.10    292,693.91 Fixed Costs        111,000.00    111,000.00        111,000.00      111,000.00    111,000.00 Income        129,800.00    141,840.00        154,482.00      167,756.10    181,693.91 Dep on Equipment=191000/5          38,200.00      38,200.00           38,200.00         38,200.00      38,200.00 Income before tax          91,600.00    103,640.00        116,282.00      129,556.10    143,493.91 Tax @35%          32,060.00      36,274.00           40,698.70         45,344.64      50,222.87 Income after Tax          59,540.00      67,366.00           75,583.30         84,211.47      93,271.04 Dep on Equipment=191000/5          38,200.00      38,200.00           38,200.00         38,200.00      38,200.00 CFAT          97,740.00    105,566.00        113,783.30      122,411.47    131,471.04

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