In: Finance
Martin Enterprises needs someone to supply it with 142,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $995,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that, in five years, this equipment can be salvaged for $136,000. Your fixed production costs will be $570,000 per year, and your variable production costs should be $19.05 per carton. You also need an initial investment in net working capital of $124,000. Assume your tax rate is 22 percent and you require a return of 11 percent on your investment. a. Assuming that the price per carton is $29.40, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Assuming that the price per carton is $29.40, find the quantity of cartons per year you can supply and still break even. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. Assuming that the price per carton is $29.40, find the highest level of fixed costs you could afford each year and still break even.
a). NPV = 1,773,002.52
Formula | Year (n) | 0 | 1 | 2 | 3 | 4 | 5 |
Initial investment (II) | 995,000 | ||||||
Number of cartons (u) | 142,000 | 142,000 | 142,000 | 142,000 | 142,000 | ||
Price per carton (p) | 29.40 | 29.40 | 29.40 | 29.40 | 29.40 | ||
Variable cost per carton (vc) | 19.05 | 19.05 | 19.05 | 19.05 | 19.05 | ||
u*p | Revenue (R) | 4,174,800 | 4,174,800 | 4,174,800 | 4,174,800 | 4,174,800 | |
u*vc | Variable Cost (VC) | 2,705,100 | 2,705,100 | 2,705,100 | 2,705,100 | 2,705,100 | |
Fixed Cost (FC) | 570,000 | 570,000 | 570,000 | 570,000 | 570,000 | ||
Depreciation (D) | 199,000 | 199,000 | 199,000 | 199,000 | 199,000 | ||
R-VC-FC-D | EBIT | 700,700 | 700,700 | 700,700 | 700,700 | 700,700 | |
25%*EBIT | Tax @ 22% | 154,154 | 154,154 | 154,154 | 154,154 | 154,154 | |
EBIT - Tax | Net income (NI) | 546,546 | 546,546 | 546,546 | 546,546 | 546,546 | |
Add: depreciation (D) | 199,000 | 199,000 | 199,000 | 199,000 | 199,000 | ||
NI + D | Operating Cash Flow (OCF) | 745,546 | 745,546 | 745,546 | 745,546 | 745,546 | |
NWC | (124,000) | 124,000 | |||||
Salvage price (s) | 136,000 | ||||||
s*(1-Tax rate) | After-tax salvage price (SV) | 106,080 | |||||
OCF+NWC+SV-II | Free Cash Flow (FCF) | (1,119,000) | 745,546 | 745,546 | 745,546 | 745,546 | 975,626 |
1/(1+d)^n | Discount factor @ 11% | 1.000 | 0.901 | 0.812 | 0.731 | 0.659 | 0.593 |
FCF*Discount factor | PV of FCF | (1,119,000) | 671,663.06 | 605,101.86 | 545,136.81 | 491,114.24 | 578,986.55 |
Sum of all PVs | NPV | 1,773,002.52 |
b). Using Solver and putting the condition of NPV = 0, with changing variable the number of cartons supplied per year, the quantity is 82,577
c). Again using Solver and putting the condition of NPV = 0, with changing variable Fixed cost, the Fixed cost per year is 1,185,028