What is the NPV of this? Question 2- (29 points) Best Treats Inc. is considering

Question

What is the NPV of this?

Question 2- (29 points) Best Treats Inc. is considering a 3 year project to produce a new line of healthy cat treats. Best Treats hired Cougs Financial Group to help evaluate the project for them The project is expected to generate sales of 500,000 cans of cat food per year at SI per can for the next 3 years. Each can costs 50 cents to produce. Fixed costs (FC) for the project, including rent on the facility, will run $35,000 per year In addition, Best Treats also signed an agreement to pay Cougs Financial $20,000 upfront for the project analysis. Further, Best Treats will need to invest a total of $300,000 in manufacturing equipments, which will be straight-line depreciated to a salvage value of S9,000 over the 3 years.(i.e, they can sell the equipments for $9,000 at the end.) Finally, the project will require an initial $16,000 investment in net working capital to build up inventory. The tax rate is 30%. The required return is 20%.

Explanation / Answer

$20,000 paid for project analysis is sunk cost and not part of computation.

Workings:

Present value of annual cash flows:

Present value of terminal cash flows

Particulars Amount Present value of annual cashflows       429,932.57 Present value of terminal cashflows         14,467.50 Total present value of future cash inflows       444,400.07 Less: present value of initial cashflows       316,000.00 Net present value       128,400.07

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