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In: Finance

#1 A company will sell Gizmos to consumers at a price of $81 per unit. The...

#1 A company will sell Gizmos to consumers at a price of $81 per unit. The variable cost to produce Gizmos is $41 per unit. The company expects to sell 18,000 Gizmos to consumers each year. The fixed costs incurred each year will be $110,000. There is an initial investment to produce the goods of $3,400,000 which will be depreciated straight line over the 15 year life of the investment to a salvage value of $0. The opportunity cost of capital is 5% and the tax rate is 28%. What is operating cash flow each year? 36106.61 Correct response: 502,666.67±1 Click "Verify" to proceed to the next part of the question.

#2Using the an annual operating cash flow of $502,666.67, what is the net present value of this investment? Number Should the company accept or reject this project? Accept Reject Click "Verify" to proceed to the next part of the question.

PLS ALSO EXPLAIN WHY #1 WAS 502,666.67

Solutions

Expert Solution

Please find the table explaining how I arrived at the 15 years cashflows and the NPV

Cost of Capital 5%
Year0 Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 Year11 Year12 Year13 Year14 Year15 Remarks
Quantity 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 Given
Selling price per unit 81 81 81 81 81 81 81 81 81 81 81 81 81 81 81 Given
Revenue 1458000 1458000 1458000 1458000 1458000 1458000 1458000 1458000 1458000 1458000 1458000 1458000 1458000 1458000 1458000 Quantity*selling price
Variable cost per unit 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41
Varaiable cost -738000 -738000 -738000 -738000 -738000 -738000 -738000 -738000 -738000 -738000 -738000 -738000 -738000 -738000 -738000 Quantity*variable cost
Fixed cost -110000 -110000 -110000 -110000 -110000 -110000 -110000 -110000 -110000 -110000 -110000 -110000 -110000 -110000 -110000
depreciation -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 -226666.7 Cost/life=3400000/15=226666.7
Operating profit 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 383333.3 Revenue-Variable cost-Fixed cost-depreciation
Taxes (28%) -107333 -107333 -107333 -107333 -107333 -107333 -107333 -107333 -107333 -107333 -107333 -107333 -107333 -107333 -107333
Operating profit after taxes 276000 276000 276000 276000 276000 276000 276000 276000 276000 276000 276000 276000 276000 276000 276000
depreciation 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 226666.7 add back as depreciation is a non cash expense and used for to take tax advantages
Cashflows -3400000 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7 502666.7
NPV 1817508.11

NPV needs to be found using NPV function in EXCEL

=NPV(rate,Year1 to year15 cashflows)-Year0 cashflow

=NPV(5%, Year1 to year15 cashflows)-3400000

NPV=1817508.11

They should acccept the project because of positive NPV

jeff jeffy answered 2 years ago
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