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 syslem as ollows: 106,500 129,500 135,500 88,500 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 wil me to 15peroent of thhe change ", sales The venable cost per unit $280, and total fixed costs are $1,200,000 per year. The equipment necessary to begin production will cost a total of $16 milion. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20 peroent. In ive years, this equipment will actualy be worth about 20 peroent of its oost The relevant tax rate is 35 percent, and the required retum is 16 peroent. Based on these preliminary estimates, what is te NPV of te project? (Enter the answer in dollars. Do not round your intermediate caloulations. Round the final answer to 2 decimal places

Explanation / Answer

NWC = 15% x Change in Sales

Cash Flows = Investment + NWC + After-tax Salvage Value + Net Income + Depreciation

0 1 2 3 4 5 Unit Sales 94,500 106,500 129,500 135,500 88,500 Investment -16,000,000 NWC -1,700,000 -738,000 -1,414,500 -369,000 2,890,500 1,331,000 Salvage 3,200,000 Sales 38,745,000 43,665,000 53,095,000 55,555,000 36,285,000 VC -26,460,000 -29,820,000 -36,260,000 -37,940,000 -24,780,000 FC -1,200,000 -1,200,000 -1,200,000 -1,200,000 -1,200,000 Depreciation -3,200,000 -2,560,000 -2,048,000 -1,638,400 -1,310,720 EBT 7,885,000 10,085,000 13,587,000 14,776,600 8,994,280 Tax (35%) -2,759,750 -3,529,750 -4,755,450 -5,171,810 -3,147,998 Net Income 5,125,250 6,555,250 8,831,550 9,604,790 5,846,282 Cash Flows -17,700,000 7,587,250 7,700,750 10,510,550 14,133,690 12,403,010 NPV 15,008,454.64

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