Question

In: Finance

A firm sells Gizmos to consumers at a price of $87 per unit. The costs to...

A firm sells Gizmos to consumers at a price of $87 per unit. The costs to produce Gizmos is $30 per unit. The company will sell 14,000 Gizmos to consumers each year. The fixed costs incurred each year will be $140,000. There is an initial investment to produce the goods of $2,400,000 which will be depreciated straight line over 5 year life of the investment to a salvage value of $0. The opportunity cost of capital is 9% and the tax rate is 25%.

1. What is the operating cash flow each year?

2. Using the operating cash flow, what is the net present value of the investment? And should the project be rejected or accepted.

Expert Solution

Operating Cash Flow = ((Selling Price - Variable cost ) * No of units - Fixed Cost - Depriciation - Taxes) + add back Depriciation

Operating Cash Flow = (((87 - 30 ) * 14000) - 140,000 - 480,000 - 25% *((87 - 30 ) * 14000) - 140,000 - 480,000) + 480,000

= 613500

Present Value of Cash Inflow =

OR

=

Where r is the discounting rate of a compounding period i.e. 9%

And n is the no of Compounding periods i.e. 5 years

=

= 2,386,301.05

NPV = Present Value of Cash Inflow - Present Value of Cash Outflow

= 2,386,301.05 - 2,400,000

= $ - 13,698.95

Reject the project since the NPV is Negative

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jeff jeffy answered 9 months ago

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