With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden...

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 8,000 in the first year, with growth of 8 percent each year for the next five years. Production of these lamps will require $45,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $105,000 per year, variable production costs are $10 per unit, and the units are priced at $38 each. The equipment needed to begin production will cost $185,000. 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 25 percent and the required rate of return is 24 percent. What is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Expert Solution

Calculation of NPV of the Project
Particulars	0	1	2	3	4	5
Initial Investment
Cost of equipment	-185000
Investment in working capital	-45000
Net investment (A)	-230000
Operating Cash Flows
Unit Sales (B) 8,000 * (1+8%)^n n=0,1,2,3,4		8000	8640	9331.2	10077.696	10883.91168
Annual Sales (C = B*$38)		304000	328320	354585.6	382952.448	413588.6438
Variable Costs (D = B*$10)		80000	86400	93312	100776.96	108839.1168
Fixed Costs (E )		105000	105000	105000	105000	105000
Depreciation (F) $185,000 / 5 years		37000	37000	37000	37000	37000
Profit Before Tax (G = C-D-E-F)		82000	99920	119273.6	140175.488	162749.527
Tax @ 25% (H = G*25%)		20500	24980	29818.4	35043.872	40687.38176
Profit After Tax (I = G-H)		61500	74940	89455.2	105131.616	122062.1453
Add back Depreciation (J = F)		37000	37000	37000	37000	37000
Net Operating Cash Flows (K = I+J)		98500	111940	126455.2	142131.616	159062.1453
Terminal Value
Recovery of net working capital (L)						45000
Total Cash Flows (M = A+K+L)	-230000	98500	111940	126455.2	142131.616	204062.1453
Discount Factor @24% (N) 1/(1+24%)^n n=0,1,2,3,4,5	1	0.806451613	0.650364204	0.524487261	0.422973598	0.34110774
Discounted Cash Flows (O = M*N)	-230000	79435.48387	72801.76899	66324.14152	60117.92098	69607.17723
Net Present Value	118286.4926
Therefore, NPV of the Project is $118,286.49

jeff jeffy answered 1 year ago

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