Question

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $30.

Year Unit Sales

1 - 36,000

2 - 44,000

3 - 13,000

4 - 7,000

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 × 36,000 × $40 = $288,000. Plant and equipment necessary to establish the giftware business will require an additional investment of $214,000. 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 40%. What is the net present value of the project? The discount rate is 15%. Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Find the NPV

Answer 1

Year	0	1	2	3	4
cost of machine	-214000
unit sales		36000	44000	13000	7000
selling price per unit		40	40	40	40
total sales		1440000	1760000	520000	280000
less variable cost		1080000	1320000	390000	210000
less depreciation		71326.2	95123	31693.4	15857.4
operating profit		288673.8	344877	98306.6	54142.6
less tax 40%		115469.5	137950.8	39322.64	21657.04
after tax profit		173204.3	206926.2	58983.96	32485.56
add depreciation		71326.2	95123	31693.4	15857.4
net operating profit		244530.5	302049.2	90677.36	48342.96
net cash flow in working capital	-288000	-64000	248000	48000	56000
net operating cash flow	-502000	180530.5	550049.2	138677.4	104343
present value factor at 15% = 1/(1+r)^ n r =15%	1	0.869565	0.756144	0.657516	0.571753
present value of net operating cash flow = present value*net operating cash flow	-502000	156983	415916.2	91182.62	59658.43
net present value = sum of present value of cash flow	221740
Year	cost of machine	Macrs rate	Annual depreciation
1	214000	33.33%	71326.2
2	214000	44.45%	95123
3	214000	14.81%	31693.4
4	214000	7.41%	15857.4
	0	1	2	3	4
total sales		1440000	1760000	520000	280000
working capital-20% of following month	-288000	-352000	-104000	-56000	0
net cash flow in working capital	-288000	-64000	248000	48000	56000