Question

In: Finance

Topperton Company has developed a new industrial product. An outlay of $8 million is required for...

Topperton Company has developed a new industrial product. An outlay of $8 million is required for equipment to produce the new product, and additional net working capital of $400,000 is required to support production and marketing. In addition, a one-time $400,000 (before-tax) expense will be incurred the year that the equipment is placed into service. The equipment will be depreciated on a straight-line basis to a zero book value over 6 years. Although the depreciable life is 6 years, the project is expected to have a productive life of 8 years, and it is estimated that the equipment can be sold for $1 million at that time. Revenues minus expenses are expected to be $3 million per year. The cost of capital for this project is 14%, and the relevant tax rate is 30%. What is the NPV of the new product?

Group of answer choices

$2,956,923

$3,326,891

$3,002,696

None of these

Solutions

Expert Solution

Depreciation schedule is below:

Straight line method
Year Opening balance Investment Depreciation Closing balance
0 8400000 8400000
1 8400000 1400000 7000000
2 7000000 1400000 5600000
3 5600000 1400000 4200000
4 4200000 1400000 2800000
5 2800000 1400000 1400000
6 1400000 1400000 0
  • Investment = Cost + Service expense
  • Depreciation = Investment/life
  • Opening balance = previous year's closing balance
  • Closing balance = Opening balance+investment - depreciation

Following is the NPV calculation:

Particulars Remark 0 1 2 3 4 5 6 7 8
EBITDA Sales-Total VC-Fixed Cost $ 30,00,000.00 $ 30,00,000.00 $ 30,00,000.00 $ 30,00,000.00 $ 30,00,000.00 $ 30,00,000.00 $ 30,00,000.00 $ 30,00,000.00
Depreciation Given $ 14,00,000.00 $ 14,00,000.00 $ 14,00,000.00 $ 14,00,000.00 $ 14,00,000.00 $ 14,00,000.00
EBT EBITDA-Depreciation $ 16,00,000.00 $ 16,00,000.00 $ 16,00,000.00 $ 16,00,000.00 $ 16,00,000.00 $ 16,00,000.00 $ 30,00,000.00 $ 30,00,000.00
Tax 30% x EBT $    4,80,000.00 $    4,80,000.00 $    4,80,000.00 $    4,80,000.00 $    4,80,000.00 $    4,80,000.00 $    9,00,000.00 $    9,00,000.00
EAT EBT-Tax $ 11,20,000.00 $ 11,20,000.00 $ 11,20,000.00 $ 11,20,000.00 $ 11,20,000.00 $ 11,20,000.00 $ 21,00,000.00 $ 21,00,000.00
Depreciation Added back as non cash $ 14,00,000.00 $ 14,00,000.00 $ 14,00,000.00 $ 14,00,000.00 $ 14,00,000.00 $ 14,00,000.00 $                       -   $                       -  
OCF EAT+Depreciation $ 25,20,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 21,00,000.00 $ 21,00,000.00
FCINV Given $ -84,00,000.00
WCINV Given $    -4,00,000.00 $                       -   $                       -   $    4,00,000.00
Salvage value Given $ 10,00,000.00
Tax on profit on sale At 30% on SP - BV $ -3,00,000.00
FCF OCF+FCINV+WCINV+Salvage Value+Tax on profit on sale $ -88,00,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 25,20,000.00 $ 21,00,000.00 $ 32,00,000.00
Discount factor Formula at 14% 1/(1+0.14)^0 1/(1+0.14)^1 1/(1+0.14)^2 1/(1+0.14)^3 1/(1+0.14)^4 1/(1+0.14)^5 1/(1+0.14)^6 1/(1+0.14)^7 1/(1+0.14)^8
Discount factor Calculated using above formula 1 0.877192982 0.769467528 0.674971516 0.592080277 0.519368664 0.455586548 0.399637323 0.350559055
DCF FCF x Discount Factor $ -88,00,000.00 $ 22,10,526.32 $ 19,39,058.17 $ 17,00,928.22 $ 14,92,042.30 $ 13,08,809.03 $ 11,48,078.10 $    8,39,238.38 $ 11,21,788.98
NPV = sum of all DCF $                        29,60,469.49

So the correct answer is none of these as NPV is 29,60,469.49


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