The following table presents sales forecasts for Golden Gelt Giftware. The unit
ID: 2652874 • Letter: T
Question
The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $20.
It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (year-0) investment in working capital of .20 × 37,000 × $40 = $296,000. Plant and equipment necessary to establish the Giftware business will require an additional investment of $215,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the equipment will have an economic and book value of zero. The firm’s tax rate is 40%. What is the net present value of the project? The discount rate is 15%. (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)
The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $20.
Explanation / Answer
Answer:
Calculation of NPV
Year 0
Year 1
Year 2
Year 3
Year 4
Units Sales
37000
45000
14000
8000
Sales Revenue ( Units * $40)
$ 1,480,000.00
$ 1,800,000.00
$ 560,000.00
$ 320,000.00
Less: Cost (Units * $20)
$ (740,000.00)
$ (900,000.00)
$ (280,000.00)
$ (160,000.00)
Less: Depreciation on Plant
$ (71,659.50)
$ (95,567.50)
$ (31,841.50)
$ (15,931.50)
(215000*33.33%)
(215000*44.45%)
(215000*14.81%)
(215000*7.41%)
Profit Before tax
$ 668,340.50
$ 804,432.50
$ 248,158.50
$ 144,068.50
Less: Tax @40%
$ (267,336.20)
$ (321,773.00)
$ (99,263.40)
$ (57,627.40)
Profit after tax
$ 401,004.30
$ 482,659.50
$ 148,895.10
$ 86,441.10
Add: Depreciation
$ 71,659.50
$ 95,567.50
$ 31,841.50
$ 15,931.50
Cash Flows After tax
$ 472,663.80
$ 578,227.00
$ 180,736.60
$ 102,372.60
Working Capital
$ (296,000)
$ (360,000)
$ (112,000)
$ (64,000)
(Next Year's Sales *20%)
(1480000*20%)
(1800000*20%)
(560000*20%)
(320000*20%)
Invetsment in Plant
$ (215,000)
Net cash Flows
$ (511,000.00)
$ 112,663.80
$ 466,227.00
$ 116,736.60
$ 102,372.60
PVF (15%)
1.00000
0.86957
0.75614
0.65752
0.57175
1/(1+0.15)^0
1/(1+0.15)^1
1/(1+0.15)^2
1/(1+0.15)^3
1/(1+0.15)^4
Present value (Net cash Flows *PVF)
$ (511,000.00)
$ 97,968.52
$ 352,534.59
$ 76,756.21
$ 58,531.87
Net Present value (Sum of PVs)
$ 74,791.19
Calculation of NPV
Year 0
Year 1
Year 2
Year 3
Year 4
Units Sales
37000
45000
14000
8000
Sales Revenue ( Units * $40)
$ 1,480,000.00
$ 1,800,000.00
$ 560,000.00
$ 320,000.00
Less: Cost (Units * $20)
$ (740,000.00)
$ (900,000.00)
$ (280,000.00)
$ (160,000.00)
Less: Depreciation on Plant
$ (71,659.50)
$ (95,567.50)
$ (31,841.50)
$ (15,931.50)
(215000*33.33%)
(215000*44.45%)
(215000*14.81%)
(215000*7.41%)
Profit Before tax
$ 668,340.50
$ 804,432.50
$ 248,158.50
$ 144,068.50
Less: Tax @40%
$ (267,336.20)
$ (321,773.00)
$ (99,263.40)
$ (57,627.40)
Profit after tax
$ 401,004.30
$ 482,659.50
$ 148,895.10
$ 86,441.10
Add: Depreciation
$ 71,659.50
$ 95,567.50
$ 31,841.50
$ 15,931.50
Cash Flows After tax
$ 472,663.80
$ 578,227.00
$ 180,736.60
$ 102,372.60
Working Capital
$ (296,000)
$ (360,000)
$ (112,000)
$ (64,000)
(Next Year's Sales *20%)
(1480000*20%)
(1800000*20%)
(560000*20%)
(320000*20%)
Invetsment in Plant
$ (215,000)
Net cash Flows
$ (511,000.00)
$ 112,663.80
$ 466,227.00
$ 116,736.60
$ 102,372.60
PVF (15%)
1.00000
0.86957
0.75614
0.65752
0.57175
1/(1+0.15)^0
1/(1+0.15)^1
1/(1+0.15)^2
1/(1+0.15)^3
1/(1+0.15)^4
Present value (Net cash Flows *PVF)
$ (511,000.00)
$ 97,968.52
$ 352,534.59
$ 76,756.21
$ 58,531.87
Net Present value (Sum of PVs)
$ 74,791.19
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.