Question

The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.17 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 20,500 tents per year at a price of $58 and variable costs of $19 per tent. The fixed costs will be $335,000 per year. The project will require an initial investment in net working capital of $169,000 that will be recovered at the end of the project. The required rate of return is 10.1 percent and the tax rate is 35 percent. What is the NPV?

$824,744

$380,043

$501,537

$578,641

$427,415

Answer 1

$427,415

Working:

a.	Calculation of depreciation
	Depreciation Expense			=	(Cost - Salvage Value)/Useful life
				=	(1170000-0)/6
				=	$       1,95,000
b.	Calculation annual cash flow
	Selling price per unit				$                   58
	Variable cost per unit				$                  -19
	Contribution margin per unit				$                   39
	Number of units sold				20,500
	Total contribution margin				$       7,99,500
	Fixed Costs				$      -3,35,000
	Depreciation Expense				$      -1,95,000
	Income before tax				$       2,69,500
	Tax Expense				$         -94,325
	Net Income				$       1,75,175
	Depreciation Expense				$       1,95,000
	Annual cash flow				$       3,70,175
c.	Calculation of NPV
	Year		0	1	2	3	4	5	6		Total
	Cost of Equipment		$        -11,70,000
	Net Working capital		$          -1,69,000
	Operating cash flow			$       3,70,175	$       3,70,175	$       3,70,175	$       3,70,175	$       3,70,175	$       3,70,175
	After tax sale of equipment								$       1,14,075
	Release of net working capital								$       1,69,000
	Total		$        -13,39,000	$       3,70,175	$       3,70,175	$       3,70,175	$       3,70,175	$       3,70,175	$       6,53,250
	Discount factor		1.0000	0.9083	0.8249	0.7493	0.6805	0.6181	0.5614
	Present Value		$        -13,39,000	$       3,36,217	$       3,05,374	$       2,77,361	$       2,51,917	$       2,28,808	$       3,66,738		$     4,27,415
	Working:
	Selling price of equipment			=	$     11,70,000	x	15%	=	$       1,75,500
	After tax sale price of equipment			=	$       1,75,500	x	(1-0.35)	=	$       1,14,075