Question

The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.35 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The company believes that it can sell 25,000 tents per year at a price of $67 and variable costs of $27 per tent. The fixed costs will be $425,000 per year. The project will require an initial investment in net working capital of $205,000 that will be recovered at the end of the project. The required rate of return is 12.6 percent and the tax rate is 35 percent. What is the NPV? $639,997 $362,602 $417,859 $522,276 $962,718

Answer 1

Annual Operating cashflows:
Sales revenue (25000*67)				1675000
Less: Variable cost (25000*27)				675000
Less: Fixed cost				425000
Less: Annual Deprecciation (1350,000/6)				225000
Net Profit before tax				350000
Less: tax @ 35%				122500
Profit after tax				227500
Add: Depreciation				225000
Annual Operating cashflows:				452500
NPV:
Annual Operating cashflows				452500
Multiply: Annuity PVF at 12.60%				4.04248
Present value of annual cashflows					1829222
Present value of release of NWC					100582.8
		(205000*0.490648)
Present value of After tax Salvage of fixed assets					43054
	(1350000*10% - 35%)*0.490648
Total Present value of Inflows					1972859
Less: Initial investment
Fixed assets investment				1,350,000
WC investment				205,000	1,555,000
Net Present value					417,859
Answer is $ 417859