Question
In: Finance
Perfect Lawns and Gardens is a small lawn equipment manufacturer. The company is analyzing a proposed...
Perfect Lawns and Gardens is a small lawn equipment manufacturer. The company is analyzing a proposed project. It expects to sell 3,000 push lawn mowers, give or take 15 percent. The expected variable cost per unit is $95 and the expected fixed costs are $125,000 per year. Both cost estimates are considered accurate within a plus or minus 5 percent range. The sale price is estimated at $180 a unit, give or take 2 percent. The project requires $240,000 of fixed assets, which will be worthless when the project ends in four years. The assets will be depreciated according to the 5-year MACRS depreciation schedule. Also required is $65,000 of net working capital investment to start the project. The tax rate is 21 percent and the required rate of return is 12 percent. What is the net present value of the worst-case scenario? What is the IRR of the worst-case scenario?
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Expert Solution
| Variables in Worst Case Scenario | |||||
| Unit in sales in case of worst cenario | 3000*(1-.15) | 2550 | |||
| variable cost | 95*(1.05) | 99.75 | |||
| fixed cost | 125000*1.05 | 131250 | |||
| selling price | 180*(1-.02) | 176.4 | |||
| Year | Depreciation base | MACRS rate | Annual depreciation | ||
| 1 | 240000 | 20% | 48000 | ||
| 2 | 240000 | 32% | 76800 | ||
| 3 | 240000 | 19.20% | 46080 | ||
| 4 | 240000 | 11.52% | 27648 | ||
| accumulated depreciation | 198528 | ||||
| loss on disposal of machine | 240000-198528 | 41472 | |||
| tax credit on loss on disposal of machine | 41472*21% | 8709.12 | |||
| Year | 0 | 1 | 2 | 3 | 4 |
| capital investment | -240000 | ||||
| Investment in working capital | -65000 | ||||
| sales in case of worst scenario | 449820 | 449820 | 449820 | 449820 | |
| variable cost in worst scenario | 254362.5 | 254362.5 | 254362.5 | 254362.5 | |
| less fixed cost | 131250 | 131250 | 131250 | 131250 | |
| depreciation | 48000 | 76800 | 46080 | 27648 | |
| operating profit | 16207.5 | -12592.5 | 18127.5 | 36559.5 | |
| less taxes-21% | 3403.575 | -2644.425 | 3806.775 | 7677.495 | |
| after tax profit | 12803.925 | -9948.075 | 14320.725 | 28882.005 | |
| add depreciation | 48000 | 76800 | 46080 | 27648 | |
| recovery of working capital | 65000 | ||||
| tax credit on loss on disposal of machine | 8709.12 | ||||
| net operating cash flow | -305000 | 60803.925 | 66851.925 | 60400.725 | 130239.125 |
| present value factor at 12% =1/(1+r)^n r = 12% | 1 | 0.892857143 | 0.797193878 | 0.711780248 | 0.635518078 |
| present value of net operating cash flow | -305000 | 54289.21875 | 53293.94531 | 42992.04301 | 82769.31845 |
| net present value = sum of present value of cash flow | -71655.47 | ||||
| IRR = Using IRR function in M S Excel | IRR(C2450:G2450) | -9% |
 |
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