Question

The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $1.67 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 10 percent of its initial cost. The company believes that it can sell 27,000 tents per year at a price of $71 and variable costs of $31 per tent. The fixed costs will be $465,000 per year. The project will require an initial investment in net working capital of $221,000 that will be recovered at the end of the project. The required rate of return is 11.4 percent and the tax rate is 40 percent. What is the NPV? explain on excel sheet .

Answer 1

CF0=-Cost of equipment-working capital=-1670000-221000

CF1, CF2, CF3, CF4, CF5,CF6,CF7=((number of cartons*(price per carton-variable cost per carton)-fixed costs per year-depreciation)*(1-tax rate)+depreciation)=((27000*(71-31)-465000-1670000/7)*(1-40%)+1670000/7)=464428.5714286

Additional cash flow in year 7=Salvage value*(1-tax rate)+working capital=1670000*10%*(1-40%)+221000

Depreciation=Initial cost of equipment/7=1670000/7

NPV=CF0+CF1/(1+r)+CF2/(1+r)^2+CF3/(1+r)^3+CF4/(1+r)^4+CF5/(1+r)^5+CF6/(1+r)^6+CF7/(1+r)^7+Additional cash flow in year 7/(1+r)^7

Using formula=-1670000+1670000*10%*(1-40%)/1.114^7-221000+221000/1.114^7+((27000*(71-31)-465000-1670000/7)*(1-40%)+1670000/7)/11.4%*(1-1/1.114^7)=420343.8583173

Using excel
=NPV(11.4%,{-1891000.0000000;464428.5714286;464428.5714286;464428.5714286;464428.5714286;464428.5714286;464428.5714286;785628.5714286})*(1+11.4%)=420343.8583174

or another formula
=-PV(11.4%,7,((27000*(71-31)-465000-1670000/7)*(1-40%)+1670000/7),221000+1670000*10%*(1-40%))-1670000-221000=420343.8583173