Question

1. Projected sales for a new PODS container follows:

Year	Unit sales
1	$1,750,000
2	2,100,000
3	2,450,000

The project will require $250,000 in net working capital to start. Variable costs are 65% of sales, and total fixed costs are $275,000 per year. The cost of equipment is $1,000,000. The equipment qualifies for a CCA rate of 20 percent. The salvage value at the end of 3 years is $450,000.  

The relevant tax rate is 30 percent, and the required return is 15 percent. What is the NPV of the project?

Answer 1

Depreciation Schedule
Year	Opening Balance	Depreciation	Closing Balance
A	B	C = B*20%	D = B-C
1	1000000	200000	800000
2	800000	160000	640000
3	640000	128000	512000

Calculation of NPV of the Project
Particulars	0	1	2	3
Initial Investment
Cost of Equipment	-1000000
Investment in net working capital	-250000
Net Investment (A)	-1250000
Operating Cash Flows
Annual Sales (B)		1750000	2100000	2450000
Variable Costs (C = B*65%)		1137500	1365000	1592500
Fixed Costs (D)		275000	275000	275000
Depreciation (E )		200000	160000	128000
Profit Before Tax (F = B-C-D-E)		137500	300000	454500
Tax @30% (G = F*30%)		41250	90000	136350
Profit After Tax (H = F-G)		96250	210000	318150
Add back Depreciation (I = E)		200000	160000	128000
Net Operating Cash flows (J = H+I)		296250	370000	446150
Terminal Value
Salvage Value (K)				450000
Unclaimed CCA (L)				512000
Loss on sale (M = K-L)				-62000
Tax @30% (N = M*30%)				-18600
After tax loss (O = M-N)				-43400
Add back unclaimed CCA (P = L)				512000
Net Salvage Value (Q = O+P)				468600
Recovery of Working Capital (R )				250000
Net Terminal Value (S = Q+R)				718600
Total Cash Flows (T = A+J+S)	-1250000	296250	370000	1164750
Discount Factor @15% (U) 1/(1+15%)^n n=0,1,2,3	1	0.869565217	0.756143667	0.657516232
Discounted Cash Flows (V = T*U)	-1250000	257608.6957	279773.1569	765842.0317
NPV of the Project	53223.88428
Therefore, NPV of the Project is $53,223.88