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With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden...

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 10,600 in the first year, with growth of 8 percent each year for the next five years. Production of these lamps will require $57,000 in net working capital to start. Total fixed costs are $143,000 per year, variable production costs are $17 per unit, and the units are priced at $60 each. The equipment needed to begin production will cost $605,000. The equipment will be depreciated using the straight-line method over a 5-year life and is not expected to have a salvage value. The tax rate is 21 percent and the required rate of return is 17 percent. What is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Solutions

Expert Solution

CM per unit:
Selling price per unit 60
Less: VC per unit 17
CM per unit: 43
OCF:
1 2 3 4 5
Units sold 10600 11448 12364 13353 14421
Multiply: CM per unit 43 43 43 43 43
Total contribution 455800 492264 531652 574179 620103
Less: Fixed cost 143000 143000 143000 143000 143000
Less: Deprreciation 121000 121000 121000 121000 121000
Net Income before tax 191800 228264 267652 310179 356103
Less: tax @ 21% 40278 47935.44 56206.92 65137.59 74781.63
After taax income 151522 180328.6 211445.1 245041.4 281321.4
Add: depreciation 121000 121000 121000 121000 121000
Annual cashflows 272522 301328.6 332445.1 366041.4 402321.4
NPV
0 1 2 3 4 5
Initial Investment in FA -605000
Investment in WC -57000
Cash flows operating 0 272522 301328.6 332445.1 366041.4 402321.4
Release of WC 57000
Net cash flows -662000 272522 301328.6 332445.1 366041.4 459321.4
PVF at 17% 1 0.854701 0.730514 0.624371 0.53365 0.456111
Present value of cashsflows -662000 232924.8 220124.6 207568.9 195338 209501.6
NPV 403458

jeff jeffy answered 4 months ago
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