Question

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $30. The unit cost of the giftware is $20.

Year Unit Sales

1 27,000

2 35,000

3 19,000

4 10,000

Thereafter 0

It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year 0) investment in working capital of .20 × 27,000 × $30 = $162,000. Plant and equipment necessary to establish the giftware business will require an additional investment of $205,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the equipment will have an economic and book value of zero. The firm’s tax rate is 30%. What is the net present value of the project? The discount rate is 16%. Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

NPV =

Answer 1

Tax rate	30%
	Year-1	Year-2	Year-3	Year-4
Tons	27,000	35,000	19,000	10,000
Sale @ 30	810,000	1,050,000	570,000	300,000
Less: Operating Cost @ 20	540,000	700,000	380,000	200,000
Contribution	270,000	350,000	190,000	100,000
Less: Depreciation as per table given below	68,327	91,123	30,361	15,191
Profit before tax	201,674	258,878	159,640	84,810
Tax	60,502	77,663	47,892	25,443
Profit After Tax	141,171	181,214	111,748	59,367
Add Depreciation	68,327	91,123	30,361	15,191
Cash Profit After tax	209,498	272,337	142,108	74,557
Working capital	Year-0	Year-1	Year-2	Year-3
Opening	-	(162,000)	(210,000)	(114,000)
Required	(162,000)	(210,000)	(114,000)	(60,000)
Change	(162,000)	(48,000)	96,000	54,000
Cost of macine		205,000
Depreciation for 5 years		205,000
WDV		-
Sale price		-
Profit/(Loss)		-
Tax		-
Sale price after tax		-
Depreciation	Year-1	Year-2	Year-3	Year-4		Total
Cost	205,000	205,000	205,000	205,000
Dep Rate	33.33%	44.45%	14.81%	7.41%
Deprecaition	68,327	91,123	30,361	15,191		205,000
Calculation of NPV
Year	Captial	Working captial	Operating cash	Annual Cash flow	PV factor @ 16%	Present values
0	(205,000)	(162,000)		(367,000)	1.000	(367,000)
1		(48,000)	209,498	161,498	0.862	139,222
2		96,000	272,337	368,337	0.743	273,734
3		54,000	142,108	196,108	0.641	125,638
4	-	60,000	74,557	134,557	0.552	74,315
				Net Present Value		245,909