With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden...

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps to accent people’s homes. They projected unit sales of these lamps to be 12,000 in the first year, with growth of 8 percent each year for the next five years. Production of these lamps will require $85,000 in net working capital to start. Total fixed costs are $185,000 per year, variable production costs are $21 per unit, and the units are priced at $67 each. The equipment needed to begin production will cost $675,000. The equipment will be depreciated using the straight-line method over a 5-year life and is not expected to have a salvage value. The tax rate is 25 percent and the required rate of return is 19 percent. What is the NPV of this project?

Expert Solution

Initial Investment = Equipment Cost + Working Capital = 675,000 + 85,000 = $ 760,000
Calculation of Cash Flow each year :-

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Unit Sales (increasing @ 8% p.a.)	12000	12960	13997	15117	16326
Contribution per unit [67-21]	46	46	46	46	46
Total Contribution	552,000	596,160	643,862	695,382	750,996
(-) Fixed Costs	185,000	185,000	185,000	185,000	185,000
(-) Depreciation [675000/5]	135,000	135,000	135,000	135,000	135,000
= Net Income	232,000	276,160	323,862	375,382	430,996
(-) Tax @ 25%	58,000	69,040	80,966	93,846	107,749
Profit after Tax	174,000	207,120	242,896	281,536	323,247
(+) Depreciation	135,000	135,000	135,000	135,000	135,000
= Cash Flow after Tax	309,000	342,120	377,896	416,536	458,247

Calculation of NPV:-

Year	Cash Flow	DF @ 19%	Present value of cash inflows
1	309000	0.8403	259653
2	342120	0.7062	241605
3	377896	0.5934	224243
4	416536	0.4987	207727
5	543247 [458247+85000]	0.4190	227620

Total present value of all cash inflows = $ 11,60,848

Initial Investment = $ 760,000

Hence Net Present Value = Total present value of all cash inflows - Initial Investment = 1160848 - 760000 = 400,848

Net Present Value [NPV] of this project is $ 400,848

ekkarill92 answered 2 years ago

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With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden...

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