With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden...

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps to accent people’s homes. They projected unit sales of these lamps to be 11,700 in the first year, with growth of 7 percent each year for the next five years. Production of these lamps will require $79,000 in net working capital to start. Total fixed costs are $176,000 per year, variable production costs are $18 per unit, and the units are priced at $64 each. The equipment needed to begin production will cost $660,000. The equipment will be depreciated using the straight-line method over a 5-year life and is not expected to have a salvage value. The tax rate is 22 percent and the required rate of return is 16 percent. What is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV=

Expert Solution

Calculation of NPV of the Project
Particulars	0	1	2	3	4	5
Initial Investment
Cost of Equipment	-660000
Investment in net working capital	-79000
Net Investment (A)	-739000

Operating Cash Flows
Sales Units (B)		11700	12519	13395.33	14333.0031	15336.31332
Annual Sales (C = B*$64)		748800	801216	857301.12	917312.1984	981524.0523
Variable Costs (D = B*$18)		210600	225342	241115.94	257994.0558	276053.6397
Fixed Costs (E )		176000	176000	176000	176000	176000
Depreciation (F) $660,000 / 5 years		132000	132000	132000	132000	132000
Profit Before Tax (G = C-D-E-F)		230200	267874	308185.18	351318.1426	397470.4126
Tax @22% (H = G*22%)		50644	58932.28	67800.7396	77289.99137	87443.49077
Profit After Tax (I = G-H)		179556	208941.72	240384.4404	274028.1512	310026.9218
Add back Depreciation (J = F)		132000	132000	132000	132000	132000
Net Operating Cash Flows (K = I+J)		311556	340941.72	372384.4404	406028.1512	442026.9218

Terminal Value
Recovery of Working Capital (L)						79000

Total Cash Flows (M = A+K+L)	-739000	311556	340941.72	372384.4404	406028.1512	521026.9218
Discount Factor@16% (N) 1/(1+16%)^n n=0,1,2,3,4,5	1	0.862068966	0.743162901	0.640657674	0.552291098	0.476113015
Discounted Cash Flows (O = M*N)	-739000	268582.7586	253375.2378	238570.9492	224245.7334	248067.6989
NPV of the Project	493842.378

Therefore, NPV of this project is $493,842.38

jeff jeffy answered 1 year ago

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With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden...

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