Question

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 11,600 in the first year, with growth of 6 percent each year for the next five years. Production of these lamps will require $77,000 in net working capital to start. Total fixed costs are $173,000 per year, variable production costs are $17 per unit, and the units are priced at $63 each. The equipment needed to begin production will cost $655,000. 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 21 percent and the required rate of return is 19 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 =

Answer 1

Net Present Value of the project = $536,093.77

Since the Net Present Value is positive, this project can be accepted.

Workings:

Note:

Net Working Capital is assumed to be recovered at the end of the project. In the absence of specific information on the same, it is a fair assumption to make on the recovery of net working capital at the end of the project as typically the net working capital gets recovered end of the project/