Question

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 8,600 in the first year, with growth of 8 percent each year for the next five years. Production of these lamps will require $51,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $111,000 per year, variable production costs are $24 per unit, and the units are priced at $52 each. The equipment needed to begin production will cost $191,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 35 percent and the required rate of return is 25 percent. What is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
NPV $ ____________

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-191000
Initial working capital		-51000
=Initial Investment outlay		-242000
Unit sales			8600	9288	10031.04	10833.523	11700.205
Profits	=no. of units sold * (sales price - variable cost)		240800	260064	280869.12	303338.65	327605.74
Fixed cost			-111000	-111000	-111000	-111000	-111000
-Depreciation	Cost of equipment/no. of years		-38200	-38200	-38200	-38200	-38200
=Pretax cash flows			91600	110864	131669.12	154138.65	178405.74
-taxes	=(Pretax cash flows)*(1-tax)		59540	72061.6	85584.928	100190.12	115963.73
+Depreciation			38200	38200	38200	38200	38200
=after tax operating cash flow			97740	110261.6	123784.93	138390.12	154163.73
reversal of working capital							51000
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							51000
Total Cash flow for the period		-242000	97740	110261.6	123784.93	138390.12	205163.73
Discount factor=	(1+discount rate)^corresponding period	1	1.25	1.5625	1.953125	2.4414063	3.0517578
Discounted CF=	Cashflow/discount factor	-242000	78192	70567.42	63377.883	56684.594	67228.052
NPV=	Sum of discounted CF=	94049.95