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 7,800 in the first year, with growth of 8 percent each year for the following four years (Years 2 through 5). Production of these lamps will require $43,000 in networking capital to start. Total fixed costs are $103,000 per year, variable production costs are $25 per unit, and the units are priced at $50 each. The equipment needed to begin production will cost $183,000. 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?

Answer 1

		Year 1	Year 2	Year 3	Year 4	Year 5
Projected Units Sales		7800	8424	9098	9826	10612
Sale Price per unit		$50	$50	$50	$50	$50
Sales Revenue		$390,000	$421,200	$454,896	$491,288	$530,591
Less :
Variable Costs		195000	210600	227448	245643.8	265295.3
Fixed Costs		$103,000	$103,000	$103,000	$103,000	$103,000
Depreciation (183000/5)		36600	36600	36600	36600	36600
Net Income before Tax		$55,400	$71,000	$87,848	$106,044	$125,695
Tax @ 40%		$22,160	$28,400	$35,139	$42,418	$50,278
Net Income		$33,240	$42,600	$52,709	$63,626	$75,417
Add : Depreciation		36600	36600	36600	36600	36600
Free Cash flow		$69,840	$79,200	$89,309	$100,226	$112,017
Purchase of Equipment	($183,000)
Networking Capital	($43,000)					$43,000
Cash flow	($226,000)	$69,840	$79,200	$89,309	$100,226	$155,017
Discount factor @ 22% (1/(1.22^n)	1	0.819672	0.671862	0.550707	0.451399	0.369999
	($226,000)	$57,246	$53,212	$49,183	$45,242	$57,356
Net Present Value	$36,238.69
Net Present Value of the project is $ 36238.69