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The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent...

The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $2.03 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 31,500 tents per year at a price of $80 and variable costs of $39 per tent. The fixed costs will be $555,000 per year. The project will require an initial investment in net working capital of $257,000 that will be recovered at the end of the project. The required rate of return is 12.3 percent and the tax rate is 40 percent. What is the NPV?

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Expert Solution

Time line 0 1 2 3 4 5 6 7
Cost of new machine -2030000
Initial working capital -257000
=Initial Investment outlay -2287000
Unit sales 31500 31500 31500 31500 31500 31500 31500
Profits =no. of units sold * (sales price - variable cost) 1291500 1291500 1291500 1291500 1291500 1291500 1291500
Fixed cost -555000 -555000 -555000 -555000 -555000 -555000 -555000
-Depreciation Cost of equipment/no. of years -290000 -290000 -290000 -290000 -290000 -290000 -290000
=Pretax cash flows 446500 446500 446500 446500 446500 446500 446500
-taxes =(Pretax cash flows)*(1-tax) 267900 267900 267900 267900 267900 267900 267900
+Depreciation 290000 290000 290000 290000 290000 290000 290000
=after tax operating cash flow 557900 557900 557900 557900 557900 557900 557900
reversal of working capital 257000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 182700
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 439700
Total Cash flow for the period -2287000 557900 557900 557900 557900 557900 557900 997600
Discount factor= (1+discount rate)^corresponding period 1 1.123 1.261129 1.4162479 1.5904464 1.7860713 2.005758 2.252466
Discounted CF= Cashflow/discount factor -2287000 496794.301 442381.39 393928.22 350782.03 312361.56 278149.21 442892.3
NPV= Sum of discounted CF= 430289.02

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