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 Year 94,000 106,000 129,000 135,000 88,000 4 The new system will be priced to sell at $400 each. The cockroach eradicator project will require $1,600,000 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 $275, and total fixed costs are $1,100,000 per year. The equipment necessary to begin production will cost a total of $15 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

Sales = Unit Sales x Price

Variable Cost = Unit Sales x VC

Depreciation = Book Value x 20%

NWC = 15% x Change in Sales

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

NPV can be calculated using NPV function in excel or calculator

NPV = $14,604,430.33

0 1 2 3 4 5 Unit Sales 94,000 106,000 129,000 135,000 88,000 Investment -16,000,000 NWC -1,600,000 -720,000 -1,380,000 -360,000 2,820,000 1,240,000 Salvage 3,200,000 Sales 37,600,000 42,400,000 51,600,000 54,000,000 35,200,000 VC -25,850,000 -29,150,000 -35,475,000 -37,125,000 -24,200,000 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 7,350,000 9,490,000 12,877,000 14,036,600 8,489,280 Tax (35%) -2,572,500 -3,321,500 -4,506,950 -4,912,810 -2,971,248 Net Income 4,777,500 6,168,500 8,370,050 9,123,790 5,518,032 Cash Flows -17,600,000 7,257,500 7,348,500 10,058,050 13,582,190 11,983,760 NPV 14,604,430.33

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