With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden...

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With the growing popularity of casual surf print clothing, tworecent MBA graduates decided to broaden this casual surf concept toencompass a “surf lifestyle for the home.” With limited capital,they decided to focus on surf print table and floor lamps to accentpeople’s homes. They projected unit sales of these lamps to be8,600 in the first year, with growth of 8 percent each year for thenext five years. Production of these lamps will require $51,000 innet working capital to start. The net working capital will berecovered at the end of the project. Total fixed costs are $111,000per year, variable production costs are $24 per unit, and the unitsare priced at $52 each. The equipment needed to begin productionwill cost $191,000. The equipment will be depreciated using thestraight-line method over a five-year life and is not expected tohave a salvage value. The effective tax rate is 35 percent and therequired rate of return is 25 percent. What is the NPV of thisproject? (Do not round intermediate calculationsand round your answer to 2 decimal places, e.g.,32.16.)

NPV $ ____________

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3.9 Ratings (770 Votes)

Time line		0	1	2	3	4	5



Cost of new machine		-191000
Initial working capital		-51000
=Initial Investment outlay		-242000


Unit sales			8600	9288	10031.04	10833.523	11700.205
Profits	=no. of units sold * (sales price - variable cost)		240800	260064	280869.12	303338.65	327605.74
Fixed cost			-111000	-111000	-111000	-111000	-111000

-Depreciation	Cost of equipment/no. of years		-38200	-38200	-38200	-38200	-38200

=Pretax cash flows			91600	110864	131669.12	154138.65	178405.74
-taxes	=(Pretax cash flows)*(1-tax)		59540	72061.6	85584.928	100190.12	115963.73
+Depreciation			38200	38200	38200	38200	38200
=after tax operating cash flow			97740	110261.6	123784.93	138390.12	154163.73

reversal of working capital							51000


+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							51000

Total Cash flow for the period		-242000	97740	110261.6	123784.93	138390.12	205163.73
Discount factor=	(1+discount rate)^corresponding period	1	1.25	1.5625	1.953125	2.4414063	3.0517578
Discounted CF=	Cashflow/discount factor	-242000	78192	70567.42	63377.883	56684.594	67228.052
NPV=	Sum of discounted CF=	94049.95

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Transcribed Image Text

With the growing popularity of casual surf print clothing, tworecent MBA graduates decided to broaden this casual surf concept toencompass a “surf lifestyle for the home.” With limited capital,they decided to focus on surf print table and floor lamps to accentpeople’s homes. They projected unit sales of these lamps to be8,600 in the first year, with growth of 8 percent each year for thenext five years. Production of these lamps will require $51,000 innet working capital to start. The net working capital will berecovered at the end of the project. Total fixed costs are $111,000per year, variable production costs are $24 per unit, and the unitsare priced at $52 each. The equipment needed to begin productionwill cost $191,000. The equipment will be depreciated using thestraight-line method over a five-year life and is not expected tohave a salvage value. The effective tax rate is 35 percent and therequired rate of return is 25 percent. What is the NPV of thisproject? (Do not round intermediate calculationsand round your answer to 2 decimal places, e.g.,32.16.) NPV $ ____________