Question

You are evaluating a project for The Farpour golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $400 per unit and sales volume to be 1000 units in year 1; 1500 units in year 2; and 1325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?

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Answer 1

Tax rate	34%
	Year-1	Year-2	Year-3
Units	1,000	1,500	1,325
Sale @ 400	400,000	600,000	530,000
Less: Operating Cost @225 per unit	225,000	337,500	298,125
Contribution	175,000	262,500	231,875
Less: Fixed Cost	100,000	100,000	100,000
Less: Depreciation as per table given below	54,995	54,995	55,011
Profit before tax	20,006	107,506	76,864
Tax	6,802	36,552	26,134
Profit After Tax	13,204	70,954	50,730
Add Depreciation	54,995	54,995	55,011
Cash Profit After tax	68,198	125,948	105,741
	Year-0	Year-1	Year-2
Required working capital	80,000	120,000	106,000
Opening working capital	-	80,000	120,000
New Infusion	80,000	40,000	(14,000)
Closing working capital	80,000	120,000	106,000
Cost of macine		165,000
Depreciation for 5 years		165,000
WDV		-
Sale price		35,000
Profit/(Loss)		35,000
Tax		11,900
Sale price after tax		23,100
Depreciation	Year-1	Year-2	Year-3			Total
Cost	165,000	165,000	165,000
Dep Rate	33.33%	33.33%	33.34%
Deprecaition	54,995	54,995	55,011			165,000
Calculation of NPV
Year	Captial	Working captial	Operating cash	Annual Cash flow	PV factor @ 10%	Present values
0	(165,000)	(80,000)		(245,000)	1.000	(245,000)
1		(40,000)	68,198	28,198	0.909	25,635
2		14,000	125,948	139,948	0.826	115,660
3	23,100	106,000	105,741	234,841	0.751	176,440
				Net Present Value		72,734