Question

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps to accent people’s homes. They projected unit sales of these lamps to be 7,700 in the first year, with growth of 6 percent each year for the following four years (Years 2 through 5). Production of these lamps will require $42,000 in networking capital to start. Total fixed costs are $102,000 per year, variable production costs are $20 per unit, and the units are priced at $48 each. The equipment needed to begin production will cost $182,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 40 percent, and the required rate of return is 22 percent. What is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What is the NPV?

Answer 1

NPV = PV of cash Inflows - PV of cash Out flows

Cash Flow = PAT + Dep

Cash Flow in Year "0":

Net Working capital = $ 42,000

Asset Cost = $ 182,000

Total Outflow = $ 224,000

Computation of Cashflow" for 1 to 5 years:

Computation of NPV: