As the finance manager of a company, you are presented with the following project. The company is considering the purchase of a new piece of equipment which would cost $210,000. This equipment will have a five-year useful life and have a salvage value of $10,000 at the end of the five-year period. Assume straight-line depreciation It is estimated that

the new equipment will be able to produce 10,000 shelves per year.

the allocated overhead for running the equipment will be $20,000 per year.

they can sell the shelves for $25 each.

the cost of sales is $15 per shelf.

Net Working Capital requirements for the project are as follows:

Year 0 = $10,000

Year 1 = $15,000

Year 2 = $17,000

Year 3 = $15,000

Year 4 = $10,000

The company has a 30% marginal tax rate and a required rate of return of 15%.

Round answers to two decimal places.

1. What is the NPV?

2. You estimate that sales for this preexisting line will increase by 1,000 units per year as long as the new line of shelves is in production. What is the new NPV?

3. You estimate that sales for this preexisting line will decrease by 500 units per year as long as the new line of shelves is in production. What is the new NPV?

3. Several employees will be let go when the project ends. Severance pay for these employees equals $25,000. If the severance pay is included, what is the new NPV? (Hint: Severance pay is a fixed expense like Selling, General, & Administrative expenses)

B D E| F 0 1 2 4 5 A 1 Assumptions 2 unit growth 3 price 4 cost of sales per unit 5 Selling, General & Admin. expense 6 initial investment 7 salvage value 8 useful life 9 Annual Depreciation 10 tax rate 11 discount rate 12 13 14 Year 15 units 16 Sales 17 Cost of sales 18 Gross Profit 19 Selling, General & Admin. 20 Depreciation 21 EBIT 22 Income Tax 23 | Unlevered Net Income 24 Add Back Depreciation 25 Subtract Change in NWC 26 Subtract Capital Expenditure 27 | Free Cash Floy 28 29 Discount Factor 30 FCF Present Value 31 NPV 32 33 34 35 Year 36 Level of NWC 37 Change in NWC 38 Cash Flow Impact of NWC 0 1 2 3 4 5