Question

A) We are evaluating a project that costs $111518, has a seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 4266 units per year. Price per unit is $51, variable cost per unit is $24, and fixed costs are $83124 per year. The tax rate is 39 percent, and we require a 13 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-9 percent. What is the NPV of the project in best-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

B)

McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $188569 on research and development for the new clubs. The plant and equipment required will cost $2838154 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $125395 that will be returned at the end of the project. The OCF of the project will be $810877. The tax rate is 32 percent, and the cost of capital is 7 percent. What is the NPV for this project? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Answer 1

a

Time line		0	1	2	3	4	5	6	7
Cost of new machine		-111518
=Initial Investment outlay		-111518
Unit sales			4649.94	4649.94	4649.94	4649.94	4649.94	4649.94	4649.94
Profits	=no. of units sold * (sales price - variable cost)		156935.5	156935.5	156935.48	156935.48	156935.48	156935.48	156935.5
Fixed cost			-75642.8	-75642.8	-75642.84	-75642.84	-75642.84	-75642.84	-75642.8
-Depreciation	Cost of equipment/no. of years		-15931.1	-15931.1	-15931.14	-15931.14	-15931.14	-15931.14	-15931.1
=Pretax cash flows			65361.49	65361.49	65361.492	65361.492	65361.492	65361.492	65361.49
-taxes	=(Pretax cash flows)*(1-tax)		39870.51	39870.51	39870.51	39870.51	39870.51	39870.51	39870.51
+Depreciation			15931.14	15931.14	15931.143	15931.143	15931.143	15931.143	15931.14
=after tax operating cash flow			55801.65	55801.65	55801.653	55801.653	55801.653	55801.653	55801.65
+Tax shield on salvage book value	=Salvage value * tax rate								0
=Terminal year after tax cash flows									0
Total Cash flow for the period		-111518	55801.65	55801.65	55801.653	55801.653	55801.653	55801.653	55801.65
Discount factor=	(1+discount rate)^corresponding period	1	1.13	1.2769	1.442897	1.6304736	1.8424352	2.0819518	2.352605
Discounted CF=	Cashflow/discount factor	-111518	49381.99	43700.88	38673.345	34224.199	30286.902	26802.568	23719.09
NPV=	Sum of discounted CF=	135271

b

Time line		0	1	2	3	4	5	6	7
Cost of new machine		-2838154
Initial working capital		-125395
=Initial Investment outlay		-2963549
after tax operating cash flow			810877	810877	810877	810877	810877	810877	810877
reversal of working capital									125395
+Tax shield on salvage book value	=Salvage value * tax rate								0
=Terminal year after tax cash flows									125395
Total Cash flow for the period		-2963549	810877	810877	810877	810877	810877	810877	936272
Discount factor=	(1+discount rate)^corresponding period	1	1.07	1.1449	1.225043	1.310796	1.4025517	1.5007304	1.605781
Discounted CF=	Cashflow/discount factor	-2963549	757829	708251.4	661917.17	618614.18	578144.09	540321.58	583063.1
NPV=	Sum of discounted CF=	1484592