In: Finance
ABC Co | |||||||
The $200,000 Markerting study cost is sunk coas as it is already incurred and will not change wheteher the project is pursued | |||||||
or not. So this is not relevant cost for evaluation. | |||||||
All Amt in $ | |||||||
Cash Flow and NPV | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Initial Investment | |||||||
Production Facilities | (15,000,000) | ||||||
Net working capital | (4,000,000) | ||||||
Tax deductible expense | (75,000) | ||||||
Add : Tax shield on Tax deductible expense=75000*35%= | 26,250 | ||||||
a | Total Investment in Initial Cash Outflow | (19,048,750) | |||||
Cash Flow from Operations | |||||||
Sales Revenue for 5000 units @$5000 each | 25,000,000 | 25,000,000 | 25,000,000 | 25,000,000 | 25,000,000 | ||
Less Variable cost @$4000/unit | 20,000,000 | 20,000,000 | 20,000,000 | 20,000,000 | 20,000,000 | ||
depreciation | 3,000,000 | 3,000,000 | 3,000,000 | 3,000,000 | 3,000,000 | ||
Fixed cost | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | ||
EBT | (3,000,000) | (3,000,000) | (3,000,000) | (3,000,000) | (3,000,000) | ||
Tax @35% | (1,050,000) | (1,050,000) | (1,050,000) | (1,050,000) | (1,050,000) | ||
Income After Tax | (1,950,000) | (1,950,000) | (1,950,000) | (1,950,000) | (1,950,000) | ||
Add Back depreciation | 3,000,000 | 3,000,000 | 3,000,000 | 3,000,000 | 3,000,000 | ||
b | Cash flow from operations | 1,050,000 | 1,050,000 | 1,050,000 | 1,050,000 | 1,050,000 | |
Terminal cash flows | |||||||
Return of Working capital | 4,000,000 | ||||||
After Tax salvage value=$3M*0.65= | 1,950,000 | ||||||
c | Total Terminal Cash flow | 5,950,000 | |||||
d | Total Cash flow =a+b+c= | (19,048,750) | 1,050,000 | 1,050,000 | 1,050,000 | 1,050,000 | 7,000,000 |
e | PV discount factor @20% =1/1.2^n | 1 | 0.8333 | 0.6944 | 0.5787 | 0.4823 | 0.4019 |
f | PV of Cash flows=d*e | (19,048,750) | 874,965 | 729,120 | 607,635 | 506,415 | 2,813,300 |
NPV =Sum of PV of cash flows= | (13,517,315) | ||||||
So NPV of the Start up project is = | $ (13,517,315) | ||||||
The Project should not be accepted as NPV is negative. |