Question
In: Finance
This project involves a new type of widget. We think we can sell 6,000 units of...
This project involves a new type of widget. We think we can sell 6,000 units of the widget per year at a price of $950 each. Variable costs will run about $400 per unit and the product should have a four-year life.
Fixed costs for the project $450,000 per year and we will need to invest a total of $1,200,000 in manufacturing equipment. The equipment will be depreciated using MACRS over 7 years. In year four, the equipment will be worth half of what we paid for it.
We will invest $1,150,000 in net working capital at the start. After that, net working capital requirements will be 25% of sales. Assume a 34% tax rate.
Year MACRS Percentage
Year 1 14.29%
Year 2 24.49%
Year 3 17.49%
Year 4 12.49%
Should we undertake this project?
Prepare a pro forma income statement for each year. Then calculate OCF. Draw this on a timeline. Then calculate NPV assuming a 28% required return.
Solutions
Expert Solution
| 0 | 1 | 2 | 3 | 4 | ||
| MACRS % | 14.29% | 24.49% | 17.49% | 12.49% | 31.24% | |
| Investment | -1,200,000 | 374,880 | ||||
| NWC | -1,150,000 | -275,000 | 1,425,000 | |||
| Salvage | 600,000 | |||||
| Sales | 5,700,000 | 5,700,000 | 5,700,000 | 5,700,000 | ||
| VC | -2,400,000 | -2,400,000 | -2,400,000 | -2,400,000 | ||
| FC | -450,000 | -450,000 | -450,000 | -450,000 | ||
| Depreciation | -171,480 | -293,880 | -209,880 | -149,880 | ||
| EBT | 2,678,520 | 2,556,120 | 2,640,120 | 2,700,120 | ||
| Tax (34%) | -910,697 | -869,081 | -897,641 | -918,041 | ||
| Net Income | 1,767,823 | 1,687,039 | 1,742,479 | 1,782,079 | ||
| OCF | -2,350,000 | 1,664,303 | 1,980,919 | 1,952,359 | 3,880,418 | |
| NPV | $2,535,819.92 |
Depreciation = Investment x MACRS %
Book Value of the asset after 4 years, BV = (1 - total MACRS%) x Investment
Cash Flows = Investment + NWC + (Salvage - BV) x (-tax rate) + Salvage + Net Income + Depreciation
NPV can be calculated using the same function in excel or calculator using 28% discount rate.
jeff jeffy answered 1 year agoRelated Solutions
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