Question

To set up the business, you will be required to purchase an equipment costing $40,000.00. You expect inventory will increase by $9,000 and accounts payable will increase by $5000.All the other working capital components will stay the same. So the change in net operating working capital is $4,000.00 at t= 0.

You expect to keep the company for 4 years and you expect to sell 7000.00 units of Pickles at a unit price of $5.00 and believe that both prices and quantity will remain the same. The fixed cost is $400 every year and variable costs will be $2.50 per unit. You plan to use the straight line depreciation and the equipment will be fully depreciated after 4 years. The salvage value is $5,000 and tax rate is 15%

What are the incremental cash flows for the 4 years

If the WACC is 10%, find the NPV

Answer 1

	T=0	T=1	T=2	T=3	T=4
Initial investment	40,000
Net Working Capital	4,000
No of Units Sold		7000	7000	7000	7000
Price /Unit		5	5	5	5
Revenue=Price/unit*no of sold		35000	35000	35000	35000
Variable cost = 2.5*no of units		17500	17500	17500	17500
Fixed Cost		400	400	400	400
Depreciation		10000	10000	10000	10000	Depreciation =(Initial Investment -0)/4
EBIT		7100	7100	7100	7100	EBIT =Revenue-Variable cost- Fixed Cost -Depreciation)
TAX = 0.15*EBIT		1065	1065	1065	1065
NI= EBIT -TAX		6035	6035	6035	6035
Add Depreciation		10000	10000	10000	10000
Add savlage value*(1-t) for last year		0	0	0	4250	Salvage value at end of Year 4 =5000
Incremental Cash flow		16035	16035	16035	20285	(NI + Depreciation+Salvage Value*(1-taxrate))
Discount rate	10.00%
NPV Using Excel formula	$9,731.60	Excel formual =NPV(Rate,Cash flows of all Years)- Initial Investment(40000+4000=44000)

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