Question

Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $1,250,000, and its economic life is five years. The machine will be fully depreciated by the straight-line method. The machine will produce 24,000 keyboards each year. The price of each keyboard will be $46 in the first year and will increase by 3 percent per year. The production cost per keyboard will be $16 in the first year and will increase by 4 percent per year. The project will have an annual fixed cost of $240,000 and require an immediate investment of $205,000 in net working capital. The corporate tax rate for the company is 21 percent. The appropriate discount rate is 8 percent.

  

What is the NPV of the investment? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Dep Per Anum = [ COst - Salvage Value ] / Useful Life

= [ $ 1250000 - $ 0 ] / 5

= $ 1250000 / 5

= $ 250000

Cash flow Calculation:

Price per Unit Calculation:

Year	Price	Calculation
1	$   46.00	Given
2	$   47.38	46*1.03
3	$   48.80	47.38*1.03
4	$   50.27	48.80*1.03
5	$   51.77	50.27*1.03

Variable cost per unit calculation:

Year	Price	Calculation
1	$              16.00	Given
2	$              16.64	16*1.04
3	$              17.31	16.64*1.04
4	$              18.00	17.31*1.04
5	$              18.72	18.00*1.04

CF calculation:

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	$ 11,04,000.00	$ 11,37,120.00	$ 11,71,233.60	$ 12,06,370.61	$ 12,42,561.73
Variable Cost	$   3,84,000.00	$   3,99,360.00	$   4,15,334.40	$   4,31,947.78	$   4,49,225.69
Dep	$   2,50,000.00	$   2,50,000.00	$   2,50,000.00	$   2,50,000.00	$   2,50,000.00
Fixed Cost	$   2,40,000.00	$   2,40,000.00	$   2,40,000.00	$   2,40,000.00	$   2,40,000.00
EBT	$   2,30,000.00	$   2,47,760.00	$   2,65,899.20	$   2,84,422.83	$   3,03,336.04
Tax @21%	$      48,300.00	$      52,029.60	$      55,838.83	$      59,728.79	$      63,700.57
Net Income	$   1,81,700.00	$   1,95,730.40	$   2,10,060.37	$   2,24,694.04	$   2,39,635.47
Cash Flow	$   4,31,700.00	$   4,45,730.40	$   4,60,060.37	$   4,74,694.04	$   4,89,635.47
Net working Cap	$                     -	$                     -	$                     -	$                     -	$   2,05,000.00
CF to be considered	$   4,31,700.00	$   4,45,730.40	$   4,60,060.37	$   4,74,694.04	$   6,94,635.47

Sales = Units * Sale Price

Variable cost = Variable cost per unit * Units

EBT = Sales - Variable cost - Dep - Fixed Cost

Tax = EBT * tax rate

Net Income = EBT - Tax

Cash flow = Net Income + Dep

CF to be condered = Cash flow + Net working capital

Cash Ouflow at year 0 = Purchase Price of Machine + Net working capital

= $ 1250000 + $ 205000

= $ 1455000

NPV calculation:

Year	CF	PVF @8 %	Disc CF
0	-14,55,000.00	1.0000	-14,55,000.00
1	4,31,700.00	0.9259	3,99,722.22
2	4,45,730.40	0.8573	3,82,141.98
3	4,60,060.37	0.7938	3,65,210.75
4	4,74,694.04	0.7350	3,48,914.29
5	6,94,635.47	0.6806	4,72,757.23
NPV			5,13,746.47