The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent...
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The Bruin's Den Outdoor Gear is considering a new 6-year projectto produce a new tent line. The equipment necessary would cost$1.35 million and be depreciated using straight-line depreciationto a book value of zero. At the end of the project, the equipmentcan be sold for 10 percent of its initial cost. The companybelieves that it can sell 25,000 tents per year at a price of $67and variable costs of $27 per tent. The fixed costs will be$425,000 per year. The project will require an initial investmentin net working capital of $205,000 that will be recovered at theend of the project. The required rate of return is 12.6 percent andthe tax rate is 35 percent. What is the NPV? $639,997 $362,602$417,859 $522,276 $962,718
The Bruin's Den Outdoor Gear is considering a new 6-year projectto produce a new tent line. The equipment necessary would cost$1.35 million and be depreciated using straight-line depreciationto a book value of zero. At the end of the project, the equipmentcan be sold for 10 percent of its initial cost. The companybelieves that it can sell 25,000 tents per year at a price of $67and variable costs of $27 per tent. The fixed costs will be$425,000 per year. The project will require an initial investmentin net working capital of $205,000 that will be recovered at theend of the project. The required rate of return is 12.6 percent andthe tax rate is 35 percent. What is the NPV? $639,997 $362,602$417,859 $522,276 $962,718
Answer & Explanation Solved by verified expert
| Annual Operating cashflows: | ||||||
| Sales revenue (25000*67) | 1675000 | |||||
| Less: Variable cost (25000*27) | 675000 | |||||
| Less: Fixed cost | 425000 | |||||
| Less: Annual Deprecciation (1350,000/6) | 225000 | |||||
| Net Profit before tax | 350000 | |||||
| Less: tax @ 35% | 122500 | |||||
| Profit after tax | 227500 | |||||
| Add: Depreciation | 225000 | |||||
| Annual Operating cashflows: | 452500 | |||||
| NPV: | ||||||
| Annual Operating cashflows | 452500 | |||||
| Multiply: Annuity PVF at 12.60% | 4.04248 | |||||
| Present value of annual cashflows | 1829222 | |||||
| Present value of release of NWC | 100582.8 | |||||
| (205000*0.490648) | ||||||
| Present value of After tax Salvage of fixed assets | 43054 | |||||
| (1350000*10% - 35%)*0.490648 | ||||||
| Total Present value of Inflows | 1972859 | |||||
| Less: Initial investment | ||||||
| Fixed assets investment | 1,350,000 | |||||
| WC investment | 205,000 | 1,555,000 | ||||
| Net Present value | 417,859 | |||||
| Answer is $ 417859 | ||||||
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