Question

Problem 2

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the unit sales price of The Ultimate to be $500 and sales volume to be 1,000 units in year 1; 1,250 units in year 2, and 1,450 units in year 3. The project has a three year life. Variable costs amount to $225 per unit and fixed costs, excluding depreciation, are $110,000 per year. The project requires an initial investment of $170,000 which is depreciated straight-line to zero over the three-year project life. The expected scrap value of the asset at the end of year 3 is $35,000. Net working capital investment is initially lowered by $80,000 and it will be fully replaced at the end of the project’s life. The tax rate is 34% and the required return on the project is 10%. What is the NPV of this project? Accordingly what is your decision?

(Please provide all the equation and step by step or Excel.xml in google drive )

(Please don't copy from another places, the answer will upload to Turnitin)

Answer 1

	0	1	2	3
Sales in units		1000	1250	1450
Sales revenue [$500/Unit]		$     5,00,000	$     6,25,000	$      7,25,000
-Variable cost [$225/Unit]		$     2,25,000	$     2,81,250	$      3,26,250
-Fixed costs		$     1,10,000	$     1,10,000	$      1,10,000
-Depreciation [170000/3]		$         56,667	$         56,667	$          56,667
=NOI		$     1,08,333	$     1,77,083	$      2,32,083
-Tax at 34%		$         36,833	$         60,208	$          78,908
=NOPAT		$         71,500	$     1,16,875	$      1,53,175
+Depreciation		$         56,667	$         56,667	$          56,667
=OCF		$     1,28,167	$     1,73,542	$      2,09,842
-Capital expenditure	$        1,70,000
+Reduction in NWC	$            80,000
+After tax salvage value = 35000*(1-34%) =				$          23,100
-Reinstatement of NWC				$          80,000
=FCF	$          -90,000	$     1,28,167	$     1,73,542	$      1,52,942
PVIF at 10%	1	0.90909	0.82645	0.75131
		[1/1.1]	[1/1.1^2]	[1/1.1^3]
PV of FCF at 10% [FCF*PVIF]	$          -90,000	$     1,16,515	$     1,43,423	$      1,14,907
NPV [Sum of PV of FCF of years 0 to 3]	$        2,84,845
DECISION:
As the NPV is positive, the project can be undertaken.