In: Finance
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years:
Year | Sales |
1 | $2,100,000 |
2 | 8,000,000 |
3 | 3,150,000 |
What is the project's expected NPV and IRR? Round your answers to 2 decimal places. Do not round your intermediate calculations.
NPV | $ |
IRR | % |
Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -4100000 | ||||||
Initial working capital | -730000 | ||||||
=Initial Investment outlay | -4830000 | ||||||
100.00% | |||||||
Sales | 2100000 | 8000000 | 3150000 | ||||
Profits | Sales-variable cost | 840000 | 3200000 | 1260000 | |||
-Depreciation | Cost of equipment/no. of years | -820000 | -820000 | -820000 | 1640000 | =Salvage Value | |
=Pretax cash flows | 20000 | 2380000 | 440000 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 12000 | 1428000 | 264000 | |||
+Depreciation | 820000 | 820000 | 820000 | ||||
=after tax operating cash flow | 832000 | 2248000 | 1084000 | ||||
reversal of working capital | 730000 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 900000 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 656000 | |||||
=Terminal year after tax cash flows | 2286000 | ||||||
Total Cash flow for the period | -4830000 | 832000 | 2248000 | 3370000 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | ||
Discounted CF= | Cashflow/discount factor | -4830000 | 756363.6 | 1857851 | 2531930.9 | ||
NPV= | Sum of discounted CF= | 316145.76 |
Total Cash flow for the period | -4830000 | 832000 | 2248000 | 3370000 | |
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.130238 | 1.277439 | 1.4438106 |
Discounted CF= | Cashflow/discount factor | -4830000 | 736127.9 | 1759771 | 2334101.2 |
NPV= | Sum of discounted CF= | 1.50898E-05 | |||
IRR is discount rate at which NPV = 0 = | 13.02% |