Question

McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $138237 on research and development for the new clubs. The plant and equipment required will cost $2829364 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $127415 that will be returned at the end of the project. The OCF of the project will be $811598. The tax rate is 32 percent, and the cost of capital is 7 percent. What is the NPV for this project?

Answer 1

Annual depreciation = Cost of equipment/Useful life = $ 2,829,364/7 = $ 404,194.86

Computation of annual cash flow:

Operating cash flow	$811,598.00
Less: depreciation	$404,194.86
PBT	$407,403.14
Less: Tax @ 32 %	$130,369.01
PAT	$277,034.13
Add: depreciation	$404,194.86
Net cash flow	$681,228.99

Initial outlay = Cost of equipment + Working capital = $ 2,829,364 + $ 127,415 = $ 2,956,779

Cash inflow in year 7^th = Net annual cash flow + Working capital return = $ 681,228.99 + $ 127,415

                                                                                                                = $ 808,643.99

Computation of NPV:

NPV = Initial outlay – PV of total cash inflow

Year	Cash Flow (C)	Computation of PV factor	PV Factor @ 7 % (F)	PV (C x F)
0	($2,956,779)	1/(1+0.07)^0	1	($2,956,779.00)
1	$681,228.99	1/(1+0.07)^1	0.934579439252336	$636,662.61
2	$681,228.99	1/(1+0.07)^2	0.873438728273212	$595,011.79
3	$681,228.99	1/(1+0.07)^3	0.816297876890852	$556,085.78
4	$681,228.99	1/(1+0.07)^4	0.762895212047525	$519,706.34
5	$681,228.99	1/(1+0.07)^5	0.712986179483668	$485,706.86
6	$681,228.99	1/(1+0.07)^6	0.666342223816512	$453,931.64
7	$808,643.99	1/(1+0.07)^7	0.622749741884591	$503,582.84
			NPV	$793,908.86

NPV of the project is $ 793,908.86

*The cost of research and development is irrelevant in computation of NPV.