Question

Carol plans to establish a new laundry. Prior to establishing her new business, she understood that she needs to conduct a market test. The cost of this test marketing is $ 65,000. The potential market is quite good at least for the next five years. That's why she is considering investing in a new machine for her new business of $ 450,000. She estimated that the depreciation will be $ 45,000 annually. by the end of project the machine can be sold again for $ 125,000 after tax. The machine is estimated to save $ 130,000 cost of capital pre-tax annually. The new product will cost around 35 percent of the sales, and the expected sales in the first year will be around $ 99,000 and will increase 25 percent annually. Carol has an empty building that can be used to do her new business. The building actually can be sold for $ 115.000 after tax. She considers that she needs an initial $ 55,000 as an initial net working capital. The net working capital at the end of each year will be equal to 20 percent of sales for that year. She considers that her current selling and the general cost are $ 32,000 and it will increase 13 percent annually due to inflation and government regulation. The tax rate is 21 percent and the discount rate is 12 percent. Based on her marketing test, she believes that the sales of a new product will increase by around 25 percent annually. However, the introduction of new business products will reduce the existing product for 20 percent.

a) How is the proposed new project analysis? Use Excel and please provide the formula or calculation so I can apply it to my task.

Answer 1

Analysis of Investment proposal

Year	0	1	2	3	4	5
Test Cost	(65000)	-	-	-	-	-
Investment Cost	(450000)	-	-	-	-	-
Annual Savings (Post Tax)	-	102700	102700	102700	102700	102700
Annual Cash Flows (Post Tax) (see Note)	-	35006.5	44429.225	56601.9992	72263.6029	92344.1759
Working Capital	(55000)	-	-	-	-	48339.8437
Opportunity Cost of Building	(115)	-	-	-	-	-
Salvage Value	-	-	-	-	-	125000
Net Cash flows	-570115	137706.5	147129.225	159301.9992	174963.6029	368384.0196
Discount factor@12%	1	0.8929	0.7972	0.7118	0.6355	0.5674
Presesent Value of Cash flows	-570115	122952	117290.5174	113388.0165	111192.5327	209030.9859
Total NPV	$103739.2846

Formula for Calculation of Discount factor = 1/ (1+r)ⁿ

r = Discount Factor

n = year

NPV is positive ,Hence accept the Project.

Calculation of Annual Cash Flows

Year	1	2	3	4	5
Sales	99000	123750	154687.5	193359.4	241699.22
Cost	34650	43312.5	54140.63	67675.78	84594.73
Selling	32000	36160	40860.8	46172.7	52175.16
Net	32350	44277.5	59686.08	79510.89	104929.3
Net of Tax	25556.5	34979.23	47152	62813.6	82894.18
Tax Saved On Depreciation	9450	9450	9450	9450	9450
Net Cash Flows	35006.5	44429.23	56602	72263.6	92344.18