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

Tax rate		30%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3			Total
Cost		$           300,000	$          300,000	$           300,000
Dep Rate		33.33%	33.33%	33.33%
Depreciation	Cost * Dep rate	$           100,000	$          100,000	$           100,000			$           300,000
Calculation of after-tax salvage value
Cost of machine			$          300,000
Depreciation			$          300,000
WDV	Cost less accumulated depreciation	$                     -
Sale price			$          100,000
Profit/(Loss)	Sale price less WDV		$          100,000
Tax	Profit/(Loss)*tax rate	$             30,000
Sale price after-tax	Sale price less tax		$             70,000
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3
No of units		140,000	240,000	340,000
Selling price		$                     10	$                    10	$                     10
Operating cost		$                       7	$                       7	$                       7
Sale		$        1,400,000	$       2,400,000	$        3,400,000
Less: Operating Cost		$           980,000	$       1,680,000	$        2,380,000
Contribution		$           420,000	$          720,000	$       1,020,000
Less: payroll		$           200,000	$          200,000	$           200,000
Less: advertising cost		$             60,000	$             60,000	$             60,000
Less: Depreciation		$           100,000	$          100,000	$           100,000
Profit before tax (PBT)		$             60,000	$          360,000	$           660,000
Tax@30%	PBT*Tax rate	$             18,000	$          108,000	$           198,000
Profit After Tax (PAT)	PBT - Tax	$             42,000	$          252,000	$           462,000
Add Depreciation	PAT + Dep	$           100,000	$          100,000	$           100,000
Cash Profit after-tax		$           142,000	$          352,000	$           562,000
Calculation of NPV
						15.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$          (300,000)	$         (100,000)		$          (400,000)	1.0000	$          (400,000)
1			$           (10,000)	$           142,000	$           132,000	0.8696	$           114,783
2			$           (10,000)	$           352,000	$           342,000	0.7561	$           258,601
3		$             70,000	$          120,000	$           562,000	$           752,000	0.6575	$           494,452
					Net Present Value	$           467,836