Question

Galloway Corporation is considering whether to launch a new product line of pre-fabricated storage garages. The total investment needed to undertake the project is $5,000,000. This amount will be depreciated straight-line to zero over the 5-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Galloway has a required return of 20 percent on new projects and is taxed at 25%. The selling price will be $60,000 per garage. The variable costs will be about half that or $39,000 per garage, and fixed costs will be $655,000 per year. Beginning in year three (3), the variable costs are expected to decrease by 5% per year due to the firm gaining comfort in the new process. Please show all your work in a spreadsheet. All totals should be formula based (i.e. PV, NPV, Total Cash Flow, etc...) Using the template below, please provide/calculate the following: The NPV of the project at 100 units. The NPV of the project at 150 units  The Financial (i.e. economic) breakeven in units. Assume the 100 and 150 units are produced through the lifetime of the project (not yearly) 1 Required Return 20% 2 Tax Rate 25% 3 Discount Rate 9.5% 4 Net Present Ve 5 IRR A #NUM! ! 67 @ 100 units ######### Revenue

Answer 1

Explanation:

 

 

The NPV of the project at 100 units is the present value of the project's cash flows. To calculate the present value of the cash flows, we discount them at the company's required return of 20%.

 

The present value of the cash flows is as follows:

 

$3,825,000 / (1 + 0.20)^1 = $3,194,444

 

$3,825,000 / (1 + 0.20)^2 = $2,611,111

 

$3,825,000 / (1 + 0.20)^3 = $2,105,263

 

$3,825,000 / (1 + 0.20)^4 = $1,666,667

 

$3,825,000 / (1 + 0.20)^5 = $1,290,909

 

 

 

The NPV of the project at 100 units is $3,194,444 + $2,611,111 + $2,105,263 + $1,666,667 + $1,290,909 = $3,731,429.

 

The NPV of the project at 150 units is the present value of the project's cash flows when the company sells 150 units. To calculate the NPV of a project at 150 units, we first need to calculate the project's cash flows.

 

The project's cash flows are as follows:

 

Revenue: 150 units x $60,000 per unit = $9,000,000

 

Variable costs: 150 units x $39,000 per unit = $5,850,000

 

Fixed costs: $655,000 per year x 5 years = $3,275,000

 

Total cash flow: $9,000,000 - $5,850,000 - $3,275,000 = $4,875,000

 

 

 

The NPV of the project at 150 units is the present value of the project's cash flows. To calculate the present value of the cash flows, we discount them at the company's required return of 20%.

 

The present value of the cash flows is as follows:

 

$4,875,000 / (1 + 0.20)^1 = $4,016,667

 

$4,875,000 / (1 + 0.20)^2 = $3,261,111

 

$4,875,000 / (1 + 0.20)^3 = $2,658,824

 

$4,875,000 / (1 + 0.20)^4 = $2,208,333

 

$4,875,000 / (1 + 0.20)^5 = $1,785,185

 

The NPV of the project at 150 units is $4,016,667 + $3,261,111 + $2,658,824 + $2,208,333 + $1,785,185 = $4,831,429.

 

The financial breakeven point is reached when the NPV of the project is zero. This occurs when the company sells 100 units.

 

The NPV of the project at 100 units is $3,731,429.

The NPV of the project at 150 units is $4,831,429.

 

The financial breakeven point is reached when the NPV of the project is zero. This occurs when the company sells 100 units.

 

The net present value (NPV) of a project is the present value of the project's cash flows. The NPV of a project at 100 units is the present value of the project's cash flows when the company sells 100 units. To calculate the NPV of a project at 100 units, we first need to calculate the project's cash flows.

 

The project's cash flows are as follows:

 

Revenue: 100 units x $60,000 per unit = $6,000,000

 

Variable costs: 100 units x $39,000 per unit = $3,900,000

 

Fixed costs: $655,000 per year x 5 years = $3,275,000

 

Total cash flow: $6,000,000 - $3,900,000 - $3,275,000 = $3,825,000