Question

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)

Answer 1