Question

Chips Inc. has come up with a new product. Chips paid $121,849 for a marketing survey to determine the viability of the product. It is felt that the product will generate sales of $644,582 per year. The fixed costs associated with this will be $190,747 per year, and variable costs will amount to 21 percent of sales. The equipment necessary for production of the product will cost $850,015 and will be depreciated in a straight-line manner for the four years of the product life. This is the only initial cost for the production. Chips is in a 32 percent tax bracket and has a required return of 13 percent. Calculate the NPV. Answer in $ to two decimals.

Answer 1

	Computation of NPV
	Year	0	1	2	3	4
A	Initial investment	-850,015
	operating cash flow
i	Sales		644,582.00	644,582.00	644,582.00	644,582.00
ii	Fixed cost		190,747.00	190,747.00	190,747.00	190,747.00
iii=i*21%	Variable cost		135,362.22	135,362.22	135,362.22	135,362.22
iv	Depreciation		212,503.75	212,503.75	212,503.75	212,503.75
v=i-ii-iii-iv	Profit before tax		105,969.03	105,969.03	105,969.03	105,969.03
vi=v*32%	tax @ 32%		33,910.09	33,910.09	33,910.09	33,910.09
vii-v-vi	Net income		72,058.94	72,058.94	72,058.94	72,058.94
B=vii+iv	operating cash flow		284,562.69	284,562.69	284,562.69	284,562.69
C=A+B	Net cash flow	(850,015.00)	284,562.69	284,562.69	284,562.69	284,562.69
D	PVIF @ 13%	1	0.88495575	0.78314668	0.69305016	0.61331873
E=C*D	Present value	(850,015.00)	251,825.39	222,854.33	197,216.22	174,527.63	(3,591.44)
		NPV =	(3,591.44)