Question

AO sam is discussing a new project amongst their management team. They want to build tankless water heaters. In order to do this, they will need to build a new assembly line that will cost them 1.5 million dollars to build. It costs $45,000 to get all the material shipped to AO sam. They will have to buy $107,000 worth of new inventory since tankless hot water heaters and normal hot water heaters use different parts. Accounts payable will increase by $75,000.

The chief marketing officer (CMO) estimates that they will sell 400 units a year for 5 years at a price of $16,000 each.

Use the data provided for A.O. Sam and their proposed project to answer this question.

What is the NPV of this project?

	A.	-$14,000
	B.	$1,987,350
	C.	$2,033,120
	D.	$2,068,572

The chief operations officer (COO) estimates that the variable costs to build these will be 80% of revenue.

The chief financial officer (CFO) says the company will use the MACRS 3 year class for depreciation. He estimates that the assembly line will have salvage value of $100,000. He notes that AO sam's tax rate is 33% and that the normal WACC is 11%.

The CEO notes that they have already extended their manufacturing plant when they thought they’d be building larger water heaters at the plant so they have the room. This extension is already paid for and cost $225,000.

Answer 1

Initial investment
New assembly line	$  1,500,000.00			$       1,770,000.00
Shipping	$       45,000.00
Increase in working Capital = 107000 + 75000	$     182,000.00
Net Initial Investment	$  1,727,000.00
Year	0	1	2	3	4	5
Initial investment	$ (1,727,000.00)
Sales = (400 units x $16000)		$    6,400,000.00	$    6,400,000.00	$       6,400,000.00	$   6,400,000.00	$  6,400,000.00
Less: Variable cost (80% x 6,400,000)		$    5,120,000.00	$    5,120,000.00	$       5,120,000.00	$   5,120,000.00	$  5,120,000.00
Annual contribution margin		$    1,280,000.00	$    1,280,000.00	$       1,280,000.00	$   1,280,000.00	$  1,280,000.00
Less: Depreciation (1545000 x MACR Dep.Rate)		$       589,941.00	$       786,765.00	$          262,137.00	$      131,157.00
Net operating income		$       690,059.00	$       493,235.00	$       1,017,863.00	$   1,148,843.00	$  1,280,000.00
Less: Tax		$       227,719.47	$       162,767.55	$          335,894.79	$      379,118.19	$     422,400.00
Net Income		$       462,339.53	$       330,467.45	$          681,968.21	$      769,724.81	$     857,600.00
Add: Depreciation		$       589,941.00	$       786,765.00	$          262,137.00	$      131,157.00	$                    -
Salvage Value					$                     -	$       67,000.00
Working Capital recovered						$     182,000.00
Net Cash Flow	$ (1,727,000.00)	$    1,052,280.53	$    1,117,232.45	$          944,105.21	$      900,881.81	$  1,106,600.00
Present value @ 11%	1	0.9009	0.8116	0.7312	0.6587	0.5935
Present value	$ (1,727,000.00)	$       948,000.48	$       906,770.92	$          690,321.59	$      593,438.75	$     656,713.24
NPV	$  2,068,244.98
Option D is correct