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With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden...

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 10,200 in the first year, with growth of 7 percent each year for the next five years. Production of these lamps will require $49,000 in net working capital to start. Total fixed costs are $131,000 per year, variable production costs are $18 per unit, and the units are priced at $60 each. The equipment needed to begin production will cost $585,000. 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 22 percent and the required rate of return is 17 percent. What is the NPV of this project?

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Expert Solution

Annual cashflows
Year-1 Year-2 Yer-3 Year-4 Year-5 Year-6
Units sold 10200 10914 11678 12495 13370 14306
CM per unit (Selling price-VC) 42 42 42 42 42 42
Contribution 428400 458388 490476 524790 561540 600852
less: Fixed cost 131000 131000 131000 131000 131000 131000
Less: Annual depreciation 97500 97500 97500 97500 97500 97500
(585000/6)
Net Income before tax 199900 229888 261976 296290 333040 372352
Less: tax @ 22% 43978 50575.36 57634.72 65183.8 73268.8 81917.44
After tax income 155922 179312.6 204341.3 231106.2 259771.2 290434.6
Add: Depreciation 97500 97500 97500 97500 97500 97500
Annual cashflows 253422 276812.6 301841.3 328606.2 357271.2 387934.6
NPV at 17%
YEar0 Year-1 Year-2 Yer-3 Year-4 Year-5 Year-6
Annual cashflows 253422 276812.6 301841.3 328606.2 357271.2 387934.6
Initial investmente -585000
Working capital investment -49000
Release of WC 49000
Cashflows -634000 -253422 276812.6 301841.3 328606.2 357271.2 436934.6
PVF at 17% 1 0.854701 0.730514 0.624371 0.53365 0.456111 0.389839
Present value of cashflows -634000 -216600 202215.4 188460.8 175360.7 162955.4 170334
NPV 48726

jeff jeffy answered 1 year ago
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