Question

A company sells Gizmos to consumers at a price of $117 per unit. The cost to produce Gizmos is $27 per unit. The company will sell 15,000 Gizmos to consumers each year. The fixed costs incurred each year will be $190,000. There is an initial investment to produce the goods of $3,400,000 which will be depreciated straight line over the 10 year life of the investment to a salvage value of $0. The opportunity cost of capital is 6% and the tax rate is 34%. What is operating cash flow each year? answer 881200

b) Using an operating cash flow of 881,200 each year, what is the NPV of this project? how do you do part b?

Answer 1

a]	INITIAL INVESTMENT:
	Cost of the new machine	$     34,00,000
	Initial investment	$     34,00,000
	OPERATING CASH FLOWS:
	Sales = 15000*117 =	$     17,55,000
	-Cost of production = 15000*27 =	$       4,05,000
	-Fixed costs other than depreciation	$       1,90,000
	-Depreciation = 3400000/10 =	$       3,40,000
	=NOI	$       8,20,000
	-Tax at 34%	$       2,78,800
	=NOPAT	$       5,41,200
	+Depreciation	$       3,40,000
	=Annual OCF	$       8,81,200
b]	PV of annual OCF = 881200*(1.06^10-1)/(0.06*1.06^10) =	$     64,85,709
	Less: Initial investment	$     34,00,000
	NPV	$     30,85,709