Question

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of four years. The cost of the machine is $40,000 and the machine will be depreciated straight line over its four-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year four. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual cost of sales in accounts payable. NWC requirements will be recognized at the beginning of each year while all other sales and costs will be recognized at the end of the each year. Therefore NWC will be required immediately and can be recovered at the end of year four. The managers expect to spend $10,000 per year for marketing and advertisement expenses. The firm is in the 20% tax bracket, and has a cost of capital of 10%. What is the NPV of the Sisyphean Corporation's project? Should you accept this project?

Answer 1

	Year 0	Year 1	Year 2	Year 3	Year 4
Initial Investment	40000
Sales (Units sales * Selling Price)		36000	39600	43560	47916
Less :Variable cost of Production (Quantity * Variable cost per unit)		18000	19800	21780	47916
Less :Fixed Cost of Production		10000	10000	10000	10000
Less : Depreciation (40000 / 4)		10000	10000	10000	10000
Earning before taxes		-2000	-200	1780	-20000
Taxes @ 20%		400	40	-356	4000
Earnings After Taxes		-1600	-160	1424	-16000
Add : Depreciation		10000	10000	10000	10000
NWC [Current Assets (2%+4%+9%)*Sales] - [Current Liability (5%)* Purchase]	4500	4950	5445	5989.5
Plus : Recapture of NWC					20884.5
Operating Cash Flows	44500	3450	4395	5434.5	14884.5
PV Factor @ 10%	1	0.909091	0.826446	0.751315	0.683013
PV of Net Cash flows (Inflow)		3136.364	3632.231	4083.02	10166.31
PV of Net Cash flows (Outflow)	44500
The net present value (NPV) of this project is		=   $ - 23482.0709 or -23482.07
NPV = PV of cash inflow - PV of cash outflow
= 21017.9291 - 44500
=   $ - 23482.0709 or -23482.07

Since the NPV is negative , We should not accept this project.