Question

Bennington Golf has developed a new laser range finder. The company has projected sales of 14,900, 17,600, 19,200, 21,400, and 15,300 units per year over the next five years, respectively. Equipment necessary for production will cost $3.4 million today and will be depreciated on a three-year MACRS schedule over the life of the project. The equipment can be sold for $275,000 at the end of the project’s life. The price and variable costs per unit in today’s dollars are $118 and $47, respectively. Fixed costs are $625,000 per year when expressed in today’s dollars. The nominal required return is 9.3 percent. The price per unit, variable cost per unit, and fixed costs are all expected to increase at the inflation rate of 3.2 percent. The company has a tax rate of 38 percent. What is the project’s NPV?

Answer 1

Year	0	1	2	3	4	5	NPV
Initial Outflow
Cost of equipment	-3,400,000
Salvage Value						275,000
Tax on gain(275000*38%)						-104,500
Capital(Outflow)/Inflow	-3,400,000	-	-	-	-	170,500
Sales (units)		14,900	17,600	19,200	21,400	15,300
Sales Price/unit =118*(1+3.2%)^n		121.78	125.67	129.69	133.84	138.13
Sales Volume		1,814,462	2,211,842	2,490,132	2,864,274	2,113,352
Variable Cost/unit=47*(1+3.2%)^n		48.50	50.06	51.66	53.31	55.02
Total Variable cost		-722,710	-880,988	-991,832	-1,140,855	-841,759
Cash Fixed Cost=625000*(1+3.2%)^n		-645,000	-665,640	-686,940	-708,923	-731,608
Deprecation Rate		33.33%	44.45%	14.81%	7.41%
Deprecation		-1,133,220	-1,511,300	-503,540	-251,940	-
Profit Before tax		-686,467	-846,086	307,819	762,557	539,985
Tax at 38%		(260,858)	(321,513)	116,971	289,771	205,194
Net Income		-425,610	-524,573	190,848	472,785	334,791
Add: Depreciation		1,133,220	1,511,300	503,540	251,940	-
Operating Cash Flow		707,610	986,727	694,388	724,725	334,791
Free Cash Flow	-3,400,000	707,610	986,727	694,388	724,725	505,291
Disc Rate	1.00000	0.91491	0.83707	0.76584	0.70068	0.64106
=1/(1+9.3%)^n
Disc. Cash Flow	-3,400,000	647,402	825,955	531,792	507,800	323,922	-563,129
NPV of the project is -563,129. since NPV<0, so project is not acceptable

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