Question

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

Answer 1

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