Question

XYZ Ltd. has developed a new product which is expected to have a life of five years before it becomes obsolete. The project would be terminated after five years. The plant and equipment is expected to have a salvage value of $500,000 at the end of the project’s life. The company is in the tax bracket of 30 per cent and required return for this project is 15 per cent. XYZ Ltd. has put together the following information about the product:

Cost of new plant and equipment $7,900,000

Transport and installation costs $100,000

Unit Sales:

Year Units Sold

1 70,000

2 120,000

3 140,000

4 80,000

5 60,000

Sales Price per Unit:

Years 1-4 $300

Year 5 $260

Variable Cost per Unit $180

Annual Fixed Costs $200,000

Net Working Capital:

An initial investment of $100,000 in net working capital is required to start the project. Additionally, net working capital equal to 10 per cent of the value of sales will be required each year including year one.

a) Calculate the yearly cash flows and the yearly net after-tax cash flow related to the project

b) Calculate the Net Present Value

Answer 1

Please find below the yearly cash flows and Net Present value. NPV is $18,128,214

Depreciation is assumed to be on straight line basis. Working capital is assumed to be released at the end of 2 years when sales is down. It is assumed that working capital initially tied up will be released so that Net Working capital is 0.

Pasting with Formula as well