In: Finance
2.
You are a financial analyst for a company that makes guitars. You
have several high-quality guitars in your product line, but are
considering adding one more. This model is very high end and only
for the serious player. You have been charged with determining
whether the project should move forward. Here’s what you
think...
You are budgeting this as a five-year project. For the first year,
you project you will sell 75 guitars at a cost of $1,000. For the
second year, sales will increase to 100. Finally, for years 3-5,
you think sales will stabilize at 200 for each year. The cost of
the guitars will be a steady 40% of sales each year. The project
will have a tax rate of 21%. The project will require Capital
Spending of $100,000 at initiation, along with an increase in Net
Working Capital of $40,000. The NCW cannot be depreciated, but the
Capital Spending will be depreciated as a three-year MACRS property
class. Those percentages are 33.33%, 44.44%, 14.82%, and 7.41% in
years 1-4, respectively. You can recover 50% of the increase in NWC
at the end of the project and will sell some of the equipment from
the Net Capital Spending for an estimated total of $15,000 at the
end. Finally, the project is expected to have a required return of
9%.
A. What is the Net Present Value (NPV) of the project? (20
pts)
B. What is the Payback Period? (20 pts)