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 Sales 100,000 112,000 135,000 141,000 94,000 The new system will be priced to sell at $465 each The cockroach eradicator project will require $2.000,000 in net working capital to start and total net working rise to 15 percent of the change in sales. The variable cost per unit iS $335, and total fixed costs are $2,300,000 per year The equipment necessary to begin production will cost a total of $21 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 15 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

CF at year 0 = -21,000,000 - 2,000,000 = -23,000,000

Change in net working capital = (15% * change in sales) = -15%*(next period sales - current period sales)

PVCCATS = $3,926,086.96

Thus NPV = -21,000,000 - 2,000,000+3,926,086.96+5,320,000+4,812,665.41+6,242,459.11+7,831,733.02+6,080,222.88

= $11,213,167.38

Year 1 2 3 4 5 Sales (in units) 100,000.00 112,000.00 135,000.00 141,000.00 94,000.00 Sales revenue (units*$465) 46,500,000.00 52,080,000.00 62,775,000.00 65,565,000.00 43,710,000.00 Variable costs (units*$335) 33,500,000.00 37,520,000.00 45,225,000.00 47,235,000.00 31,490,000.00 Fixed costs 2,300,000.00 2,300,000.00 2,300,000.00 2,300,000.00 2,300,000.00 Net profit 10,700,000.00 12,260,000.00 15,250,000.00 16,030,000.00 9,920,000.00 Taxes (35%) 3,745,000.00 4,291,000.00 5,337,500.00 5,610,500.00 3,472,000.00 Net profit after tax 6,955,000.00 7,969,000.00 9,912,500.00 10,419,500.00 6,448,000.00 Changes in NWC (837,000.00) (1,604,250.00) (418,500.00) 3,278,250.00 1,581,500.00 NWC balance (2,837,000.00) (4,441,250.00) (4,859,750) (1,581,500.00) 0.00 Cash flow = Net profit after tax+changes in NWC 6,118,000.00 6,364,750.00 9,494,000.00 13,697,750.00 8,029,500.00 Salvage value 4,200,000.00 Total cash flow 6,118,000.00 6,364,750.00 9,494,000.00 13,697,750.00 12,229,500.00 PVIF (at 15%) 0.8696 0.7561 0.6575 0.5718 0.4972 Present value of cash flows 5,320,000.00 4,812,665.41 6,242,459.11 7,831,733.02 6,080,222.88

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