Question

ABC is considering launching a new product.

a. The initial investment in equipment is 300,000. This investment will be depreciated straight line over 3 years to a value of zero, but when the project comes to an end in 3 years, the equipment, in fact, be sold for 100,000.

b. ABC already spent 120,000 on market share research. The project will require on annual advertising cost of 60,000.

c. ABC estimates that the first year unit of sale will be 140,000 units. The unit of sale grow up by 100,000 units a year.

d. ABC planned price per unit is 10 and each product costs 7 to make.

e. ABC needs to spend 100,000 in its working capital account when it launched this. The company projects this working capital account will increase by 10,000 every year and capital will reduce to zero in the final year of the project.

d. ABC's current payroll expense is 400,000. The company projects the total payment will go up bu 50% if they launch the new product.

f. ABC's cost of capital is 15% and tax rate is 30%.

Qn1. Calculate the following to represent a discounted cash flow analysis.

price per unit
cost per unit
cost of capital

Qn2.

	year	year	year	year
tax on gain
unit of sales
working capital
sales
cost of goods sold
depreciation
advertising
salary
income before tax
tax 30%
CF
Changes in WC
capital investment and recovery
Net CFs

Qn3. calculate the NPV.

Answer 1

Qn1.
price per unit	10
cost per unit	7
cost of capital	15%
Qn2.
Year	0	1	2	3
1.tax on gain				-30000
2.unit of sales		140000	240000	340000
3.working capital	100000	110000	120000	0
4.sales		1400000	2400000	3400000
5.cost of goods sold		-980000	-1680000	-2380000
6.depreciation		-100000	-100000	-100000
7.advertising		-60000	-60000	-60000
8.salary(400000*1.5)		-600000	-600000	-600000
9.income before tax(sum 4 to 8)		-340000	-40000	260000
10.tax 30%(9*30%)		102000	12000	-78000
11.OCF(9+10-6)		-138000	72000	282000
12.Changes in WC	-100000	-10000	-10000	120000
13.capital investment and recovery	-300000			100000
14.Net CFs(1+11+12+13)	-400000	-148000	62000	472000
Qn3. calculation of NPV.
15.PV F at 15%(1/1.15^Yr.n)	1	0.86957	0.75614	0.65752
16.PV at 15%(14*15)	-400000	-128696	46880.91	310347.7
17. NPV at 15%(Sum of row 16)	-171467