Question

you just discovered that there is a market for hypothetical mini plastic and this market will last 3 years. you also have the following
project to manufacture them with the following details:

Sales price = $5 per unit
Number of unit produced and soldper annum = 10,000
Variable cost = $3 per unit
Fixed cost = $5000 per annum
intial outlay = $ 21000
Depreciation = straght-line
working capital= 20% of annual sales
tax rate is 34%
required rate is 34%
required rate of returb = 20%

is this project worth undertaking?

Answer 1

Particulars	Year 0	Year1	Year2	Year3
Initial Investment (1)	-21000
Depreciation (Straight Line Method)		21000/3=7000	21000/3=7000	21000/3=7000
Depreciation Tax Shield ( TaxRate*Depreciation)(2)		7000*0.34= 2380	7000*0.34= 2380	7000*0.34= 2380
Units per annum		10000	10000	10000
Sales Value ($5 per unit)		50000	50000	50000
Less: Variable Cost ($3 per unit)		30000	30000	30000
Less: Fixed Cost ($)		5000	5000	5000
Business Cashflow (Sales Value - Variable Cost-Fixed Cost)		15000	15000	15000
After Tax Cashflow ( Business Cashflow *(1-TaxRate) (3)		15000(1-0.34)= 9900	15000(1-0.34)= 9900	15000(1-0.34)= 9900
Working Capital ( @20% of Annual Sales)		50000*0.20=10000	50000*0.20=10000
Net Change in Working Capital (4)		0-10000 = -10000	10000-10000=0	10000-0=10000
Net Cash Flow (1+2+3+4)	-21000	2380+9900-10000=2280	2380+9900=12280	2380+9900+10000=22280

Now as we know the Net Cash Flow we will find the NPV of the project

NPV = -21000 + 2280(P/F,20%,1)+12280(P/F,20%,2)+22280(P/F,20%,3)

NPV = -21000 +2280(0.8333) +12280(0.6944)+22280(0.5787)

NPV = -21000 + 1900 +8527.232+ 12893.436

NPV = $2320.668

Since NPV is positive we will take up the project