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 be9,000 in the first year, with growth of 7 percent each year for thefollowing four years (Years 2 through 5). Production of these lampswill require $55,000 in networking capital to start. Total fixedcosts are $115,000 per year, variable production costs are $24 perunit, and the units are priced at $52 each. The equipment needed tobegin production will cost $195,000. The equipment will bedepreciated using the straight-line method over a five-year lifeand is not expected to have a salvage value. The effective tax rateis 40 percent, and the required rate of return is 25 percent. Whatis the NPV of this project?

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Solution Calculation of Quantity sold each year for 5 years Year Quantity Sold Working 1 9000 2 9630 9000107 3 10304 9630107 4 11025 10304107 5 11797 11025107 Each Year Quantity would increase by 7 from prevous year Given Net working Capital Required 55000 at Start Total Fixed Costs 115000 per year Variable costs 24 Per unit Selling See Answer

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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 be9,000 in the first year, with growth of 7 percent each year for thefollowing four years (Years 2 through 5). Production of these lampswill require $55,000 in networking capital to start. Total fixedcosts are $115,000 per year, variable production costs are $24 perunit, and the units are priced at $52 each. The equipment needed tobegin production will cost $195,000. The equipment will bedepreciated using the straight-line method over a five-year lifeand is not expected to have a salvage value. The effective tax rateis 40 percent, and the required rate of return is 25 percent. Whatis the NPV of this project?