Question

We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows:

Year	Unit Sales
1	94,000
2	106,000
3	129,000
4	135,000
5	88,000

The new system will be priced to sell at $400 each.

The cockroach eradicator project will require $1,600,000 in net working capital to start, and total net working capital will rise to 15% of the change in sales. The variable cost per unit is $275, and total fixed costs are $1,100,000 per year. The equipment necessary to begin production will cost a total of $15 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20%. In five years, this equipment will actually be worth about 20% of its cost.

The relevant tax rate is 35%, and the required return is 15%. Based on these preliminary estimates, what is the NPV of the project? (Enter the answer in dollars. Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

NPV           $

Answer 1

Answer :

Period	1	2	3	4	5	Note No.
Total Sales	37,600,000	42,400,000	51,600,000	54,000,000	35,200,000	1
Less : Variable Costs	-25,850,000	-29,150,000	-35,475,000	-37,125,000	-24,200,000	2
Less : Fixed Costs	-1,100,000	-1,100,000	-1,100,000	-1,100,000	-1,100,000
Less : Depreciation	-3,000,000	-2,400,000	-1,920,000	-1,536,000	-1,228,800	3
Earnings Before tax	7,650,000	9,750,000	13,105,000	14,239,000	8,671,200
Less : Tax @35%	-2,677,500	-3,412,500	-4,586,750	-4,983,650	-3,034,920
Earnings after tax	4,972,500	6,337,500	8,518,250	9,255,350	5,636,280
Add : Depreciation	3,000,000	2,400,000	1,920,000	1,536,000	1,228,800
Cash Flows from operations	7,972,500	8,737,500	10,438,250	10,791,350	6,865,080

Period	0	1	2	3	4	5
Cash Flows from operations		7,972,500	8,737,500	10,438,250	10,791,350	6,865,080
Change in Net Working Capital (Note no. 4)	-1,600,000	-4,040,000	-720,000	-1,380,000	-360,000	2,820,000
Equipment Cost and Salvage	-15,000,000					3,000,000
Total Cash Flows	-16,600,000	3,932,500	8,017,500	9,058,250	10,431,350	12,685,080

Calculation of Net Present Value

Year	Total Cash Flows	PV @15%	Present Value
0	-16,600,000	1	-16,600,000
1	3,932,500	0.86957	3,419,565.2174
2	8,017,500	0.75614	6,062,381.8526
3	9,058,250	0.65752	5,955,946.4124
4	10,431,350	0.57175	5,964,158.2184
5	12,685,080	0.49718	6,306,726.6614
	Total		11,108,778.3622

So, NPV = $11,108,778.36

Notes :

(1) Calculation of Total Sales :

Period	1	2	3	4	5
Units sold	94,000	106,000	129,000	135,000	88,000
Selling Price per unit	400	400	400	400	400
Total Sales = Units sold x Selling price per unit	37,600,000	42,400,000	51,600,000	54,000,000	35,200,000

(2) Calculation of Total Variable cost :

Period	1	2	3	4	5
Units sold	94,000	106,000	129,000	135,000	88,000
Variable Cost Per unit per unit	275	275	275	275	275
Total Variable Cost = Units sold x Variable Cost per unit	25,850,000	29,150,000	35,475,000	37,125,000	24,200,000

(3) Calculation of Depreciation :

	Particulars	Amount	Calculations
1	Opening Book Value at year 1	15,000,000
	Less : Depreciation for Year 1	-3,000,000	15,000,000 x 20%
2	Opening Book Value at year 2	12,000,000
	Less : Depreciation for Year 2	-2,400,000	12,000,000 x 20%
3	Opening Book Value at year 3	9,600,000
	Less : Depreciation for Year 3	-1,920,000	9,600,000 x 20%
4	Opening Book Value at year 4	7,680,000
	Less : Depreciation for Year 4	-1,536,000	7,680,000 x 20%
5	Opening Book Value at year 5	6,144,000
	Less : Depreciation for Year 5	-1,228,800	6,144,000 x 20%
	Closing Book Value at year 5	4,915,200

(4) Calculation of change in Net Working Capital :

Period	0	1	2	3	4	5
Total Sales		37,600,000	42,400,000	51,600,000	54,000,000	35,200,000
Net Working Capital at beginning	1,600,000
Net Working Capital = Sales x 15%		5,640,000	6,360,000	7,740,000	8,100,000	5,280,000
Change in Net Working Capital	-1,600,000	-4,040,000	-720,000	-1,380,000	-360,000	2,820,000