Under a special licensing arrangement, Swinyard Company has an opportunity tomar
ID: 2486926 • Letter: U
Question
Under a special licensing arrangement, Swinyard Company has an opportunity tomarket a new product for a 5 year period. The product would be purchased from themanufacturer and Swinyard would be responsible for promotion and distribution costs.
cost of equipment needed $60,000
working capital needed (released atthe end of the project) $100,000
overhaul of equipment in year 4 $5,000
salvage value of equipment at theend of 5 years$10,000
annual revenues and costs
sales revenues $200,000
cost of goods sold $125,000
other operating costs $35,000
At the end of the 5 year period, the working capital would be released forinvestment elsewhere. Swinyard uses a 12% discount rate. Ignore taxes anddepreciation.Calculate the NPV of the investment. Please show your calculations.Should Swinyard proceed with the investment based on your analysis?
Explanation / Answer
year
Amount
Discount factor
Present value
0
Cost
-60,000
1.000
-60,000
0
Working capital
-100,000
1.000
-100,000
1
Net income
40,000
.89286
35,714
2
40,000
.79719
31,888
3
40,000
.71178
28,471
4
35,000*
.63552
22,243
5
150,000**
.56743
85,115
NPV
43,431
*40,000 - $5000 overhaul expense
** 40,000 net income +10,000 salvage value + Working capital 100,000=150,000
year
Amount
Discount factor
Present value
0
Cost
-60,000
1.000
-60,000
0
Working capital
-100,000
1.000
-100,000
1
Net income
40,000
.89286
35,714
2
40,000
.79719
31,888
3
40,000
.71178
28,471
4
35,000*
.63552
22,243
5
150,000**
.56743
85,115
NPV
43,431
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