Question

The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.29 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 23,500 tents per year at a price of $64 and variable costs of $25 per tent. The fixed costs will be $395,000 per year. The project will require an initial investment in net working capital of $193,000 that will be recovered at the end of the project. The required rate of return is 10.7 percent and the tax rate is 35 percent. What is the NPV?

Answer 1

Solution :-

Depreciation Per Year = $1,290,000 / 6 = $215,000

Salvage Value = $1,290,000 * 15% = $193,500

After tax Salvage Value = $193,500 * ( 1 - 0.35 ) = $125,775

Therefore NPV of Project = $457,864.24

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