Question

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage).

The land has a current market value of​ $2,737,643. ​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation). ​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project’s life​ (t =​ 10). ​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company’s operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​•

The company’s tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project’s WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes). What is the​ project's NPV? Round to nearest whole dollar value

Answer 1

Statement showing NPV

Particulars	0	1	2	3	4	5	6	7	8	9	10	NPV = sum of PV
Value of land(opportunity cost)	-2737643
Initial cost	-20000000
Changes in WC (-3500000-1500000+2000000)	-3000000
Sales		8000000	8000000	8000000	8000000	8000000	8000000	8000000	8000000	8000000	8000000
Operating cost		-4000000	-4000000	-4000000	-4000000	-4000000	-4000000	-4000000	-4000000	-4000000	-4000000
Depreciation		-2000000	-2000000	-2000000	-2000000	-2000000	-2000000	-2000000	-2000000	-2000000	-2000000
PBT		2000000	2000000	2000000	2000000	2000000	2000000	2000000	2000000	2000000	2000000
Less : tax @ 35%		-700000	-700000	-700000	-700000	-700000	-700000	-700000	-700000	-700000	-700000
PAT		1300000	1300000	1300000	1300000	1300000	1300000	1300000	1300000	1300000	1300000
Add: Depreciation		2000000	2000000	2000000	2000000	2000000	2000000	2000000	2000000	2000000	2000000
Annual cash flow		3300000	3300000	3300000	3300000	3300000	3300000	3300000	3300000	3300000	3300000
Relaease of WC											3000000
Cash flow from sale of factory											3625000
Total cash flow	-25737643	3300000	3300000	3300000	3300000	3300000	3300000	3300000	3300000	3300000	9925000
PVIF @ 10%	1.0000	0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665	0.4241	0.3855
PV	-25737643.00	3000000.00	2727272.73	2479338.84	2253944.40	2049040.37	1862763.97	1693421.79	1539474.35	1399522.14	3826517.15	-2906347.26

Thus NPV = -2,906,347.26

Statement showing cash flow from sale of factory

Particulars	Amouny
Sale of factory at end of year 10	4500000
Book value of land	2000000
Profit	2500000
Tax @ 35%	875000
Cash flow from sale of factory (4500000-8750000)	3625000