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The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent...
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? show work on excel sheet .
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Expert Solution
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |||
| Cost of new machine | -1670000 | ||||||||||
| Initial working capital | -221000 | ||||||||||
| =Initial Investment outlay | -1891000 | ||||||||||
| 100.00% | |||||||||||
| Unit sales | 27000 | 27000 | 27000 | 27000 | 27000 | 27000 | 27000 | ||||
| Profits | =no. of units sold * (sales price - variable cost) | 1080000 | 1080000 | 1080000 | 1080000 | 1080000 | 1080000 | 1080000 | |||
| Fixed cost | -465000 | -465000 | -465000 | -465000 | -465000 | -465000 | -465000 | ||||
| -Depreciation | Cost of equipment/no. of years | -238571.429 | -238571.429 | -238571.429 | -238571.4286 | -238571.4 | -238571.4 | -238571.429 | -2.33E-10 | =Salvage Value | |
| =Pretax cash flows | 376428.5714 | 376428.5714 | 376428.5714 | 376428.5714 | 376428.57 | 376428.57 | 376428.5714 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | 225857.1429 | 225857.1429 | 225857.1429 | 225857.1429 | 225857.14 | 225857.14 | 225857.1429 | |||
| +Depreciation | 238571.4286 | 238571.4286 | 238571.4286 | 238571.4286 | 238571.43 | 238571.43 | 238571.4286 | ||||
| =after tax operating cash flow | 464428.57 | 464428.57 | 464428.57 | 464428.57 | 464428.57 | 464428.57 | 464428.57 | ||||
| reversal of working capital | 221000 | ||||||||||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 100200 | |||||||||
| +Tax shield on salvage book value | =Salvage value * tax rate | -9.3132E-11 | |||||||||
| =Terminal year after tax cash flows | 321200 | ||||||||||
| Total Cash flow for the period | -1891000 | 464428.57 | 464428.57 | 464428.57 | 464428.57 | 464428.57 | 464428.57 | 785628.57 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.114 | 1.240996 | 1.382469544 | 1.540071072 | 1.7156392 | 1.911222 | 2.129101353 | ||
| Discounted CF= | Cashflow/discount factor | -1891000 | 416901.7684 | 374238.5713 | 335941.2669 | 301563.0762 | 270702.94 | 243000.84 | 368995.3834 | ||
| NPV= | Sum of discounted CF= | 420343.85 | |||||||||
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