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 2 3 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

(1) For increase in working capital = (Year 2 sales - Year 1 sales) * 0.15, ( Y3 - Y2) * 0.15 and (Y4 - Y3)*0.15 But in the year - 5 we have decrease in sales. so total increase in working capital for last 3 years is recovered back in year - 4. Initial working capital of 1700,000 is recovered back at end of year - 5

(2) Asset sold for 16,000,000 * 20% = 3200,000. But book value on that date = 16000,000 (0.80)5 = 5242880

So Loss = 5242880 - 3200,000 = 2042880. Tax saved on it = 715008

(3) Investment = 16000,000 + working capital 1700,000 = 17700,000

Year 1 2 3 4 5 Unts 94500 108500 129500 135500 88500 Sales ($) 38745000 44485000 53095000 55555000 36285000 (-) Vaiable cost 26460000 30380000 36260000 37940000 24780000 Contribution 12285000 14105000 16835000 17615000 11505000 (-) Fixed cost 1200000 1200000 1200000 1200000 1200000 (-) Depreciation 3200000 2560000 2048000 1638400 1310720 EBT 7885000 10345000 13587000 14776600 8994280 (-) Tax 2759750 3620750 4755450 5171810 3147998 EAT 5125250 6724250 8831550 9604790 5846282 (+) Depreciation 3200000 2560000 2048000 1638400 1310720 CFAT 8325250 9284250 10879550 11243190 7157002 (-) Increase in WC 861000 1291500 369000 (+) Release of WC 2521500 1700000 Net cash flow 7464250 7992750 10510550 13764690 8857002 Sale of equipment 3200000 (+) tax saved 715008 12772010 DF 0.862069 0.743163 0.640658 0.5522911 0.476113 PV 6434698 5939915 6733665 7602115.8 6080920 Total PV 32791314 (-) Investment 17700000 NPV 15091314

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.