Question

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 8,600 in the first year, with growth of 8 percent each year for the following four years (Years 2 through 5). Production of these lamps will require $51,000 in networking capital to start. Total fixed costs are $111,000 per year, variable production costs are $24 per unit, and the units are priced at $52 each. The equipment needed to begin production will cost $191,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 35 percent, and the required rate of return is 25 percent. What is the NPV of this project?

Answer 1

Answer: NPV : $ 94,056

	0	1	2	3	4	5
Cost of Equipment	(191,000)
Working Capital	( 51,000)
Unit Sales		8,600	9,288	10,031	10,834	11,700
Contribution Margin		240,800	260,064	280,868	303,352	327,600
Less: Fixed Costs		111,000	111,000	111,000	111,000	111,000
EBITDA		129,800	149,064	169,868	192,352	216,600
Depreciation Expense		38,200	38,200	38,200	38,200	38,200
Operating Cash Flows after Taxes		97,740	110,262	123,784	138,399	154,160
Working Capital Released						51,000
Total Cash Flows	(242,000)	97,740	110,262	123,784	138,399	205,160
PV factor at 25 %	1.0000	0.80	0.64	0.512	0.4096	0.3277
Present Values	(242,000)	78,192	70,568	63,377.41	56,688	67,231
Net Present Value	94,056.41

Contribution margin per unit = Unit Selling Price - Unit Variable Cost = $ 52 - $ 24 = $ 28

Annual depreciation = $ 191,000 / 5 = $ 38,200

Operating cash flows after taxes = EBITDA * ( 1 - t ) + Depreciation * t