Question

McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $106,059 on research and development for the new clubs. The plant and equipment required will cost $2,885,114 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $134,309 that will be returned at the end of the project. The OCF of the project will be $890,588. The tax rate is 28 percent, and the cost of capital is 12 percent. What is the NPV for this project?

Answer 1

Present value of operating cash flow			$    8,90,588.00	*	4.563757	=	$ 40,64,426.81
Present value of release of working capital			$    1,34,309.00	*	0.452349	=	$       60,754.57
Total Present value of cash inflow (a)							$ 41,25,181.38
Plant and equipment cost							$ 28,85,114.00
Working Capital cost							$    1,34,309.00
Present value of cash outflow (b)							$ 30,19,423.00
Net Present Value (NPV)   (a) - (b)							$ 11,05,758.38
Working;
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.12)^-7)/0.12		i	=	12%
	=	4.563757		n	=	7
Present Value of 1	=	(1+i)^-n		Where,
	=	(1+0.12)^-7		i	=	12%
	=	0.452349		n	=	7
The company has spent on research and development for the new clubs.It is sunk cost and irrelevant for project.