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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

jeff jeffy answered 4 months ago
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