We project unit sales for a new household-use laser-guided cockroach search and

Question

We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows: 94,500 106,500 129,500 135,500 88,500 5 The new system will be priced to sell at $410 each The cockroach eradicator project will require $1,700,000 in net working capital to start, and total net working capital will rise to 15 percent of the change in sales. The variable cost per unit is $280, and total fixed costs are $1,200,000 per year. The equipment necessary to begin production will cost a total of $16 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20 percent. In five years, this equipment will actually be worth about 20 percent of its cost. The relevant tax rate is 35 percent, and the required return is 16 percent. Based on these preliminary estimates, what is the NPV of the project? (Enter the answer in dollars. Do not round your intermediate calculations. Round the final answer to 2 decimal places.) NPV

Explanation / Answer

Calculation of NPV of the project Year 0 1 2 3 4 5 NPV Equipment Purchase -$16,000,000 Additional Net working Capital -$1,700,000 -$738,000 -$1,414,500 -$369,000 $0 $0 Recovery of Net working capital $4,221,500 After tax operating cash flow $8,325,250 $9,115,250 $10,879,550 $11,243,190 $7,157,002 After Tax salvage value $3,915,008 Net Cash flow -$17,700,000 $7,587,250 $7,700,750 $10,510,550 $11,243,190 $15,293,510 Discount Factor @ 16%                           1               0.86207          0.74316                0.64066                0.55229          0.47611 Present Values -$17,700,000 $6,540,733 $5,722,912 $6,733,665 $6,209,514 $7,281,439 $14,788,262 NPV of the project $14,788,262 Working Calculation of after tax operating cash flow Year 1 2 3 4 5 Sales in Units 94500 106500 129500 135500 88500 x Selling price per unit $410 $410 $410 $410 $410 Sales   $38,745,000 $43,665,000 $53,095,000 $55,555,000 $36,285,000 Less : Variable cost $26,460,000 $29,820,000 $36,260,000 $37,940,000 $24,780,000 Less : Fixed Cost $1,200,000 $1,200,000 $1,200,000 $1,200,000 $1,200,000 Less : Depreciation $3,200,000 $2,560,000 $2,048,000 $1,638,400 $1,310,720 Profit before tax $7,885,000 $10,085,000 $13,587,000 $14,776,600 $8,994,280 Less : Tax @ 35% $2,759,750 $3,529,750 $4,755,450 $5,171,810 $3,147,998 Add : Depreciation $3,200,000 $2,560,000 $2,048,000 $1,638,400 $1,310,720 Operating Cash flow $8,325,250 $9,115,250 $10,879,550 $11,243,190 $7,157,002 Calculation of CCA Depreciation at a rate of 20% on Equipment Year Beginning WDV Depreciation 1 $16,000,000 $3,200,000 2 $12,800,000 $2,560,000 3 $10,240,000 $2,048,000 4 $8,192,000 $1,638,400 5 $6,553,600 $1,310,720 Calculation of after tax salvage value of equipment at the end of 5th year Salvage value $3,200,000 Less : Book value $5,242,880 Loss on sale -$2,042,880 Less : Tax @ 35% -$715,008 After Tax salvage value $3,915,008

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