Question

McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $164,145 on research and development for the new clubs. The plant and equipment required will cost $2,846,737 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $129,174 that will be returned at the end of the project. The OCF of the project will be $879,301. The tax rate is 34 percent, and the cost of capital is 11 percent. What is the NPV for this project?

Answer 1

Present value of operating cash flow			$    8,79,301.00	*	4.712196	=	$ 41,43,438.89
Present value of release of working capital			$    1,29,174.00	*	0.481658	=	$       62,217.74
Total Present value of cash inflow (a)							$ 42,05,656.63
Plant and equipment cost							$ 28,46,737.00
Working Capital cost							$    1,29,174.00
Present value of cash outflow (b)							$ 29,75,911.00
Net Present Value (NPV)   (a) - (b)							$ 12,29,745.63
Working;
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.11)^-7)/0.11		i	=	11%
	=	4.712196		n	=	7
Present Value of 1	=	(1+i)^-n		Where,
	=	(1+0.11)^-7		i	=	11%
	=	0.481658		n	=	7
The company has spent $164,145 on research and development for the new clubs.It is sunk cost and irrelevant for project.