How would you find the profitability of this project? Pretax salvage value $1,10

Question

How would you find the profitability of this project?

Pretax salvage value $1,100,000.00

Marketing study                     $100,000

New PDA cost                       $200,000

Fixed Cost                             $2.1 million

Estimated sales per year:

Year 1 - $75,000

Year 2 - $85,000

Year 3 - $80,000

Year 4 - $70,000

Year 5 - $65,000

Unit price of new product     $240

Equipment                              $10.5 million

Value of equipment in 5 years - $1.1 million

Networking Capital               22%  No initial outlay for NWC

Corporate tax                        30%

Required return                      10%

Explanation / Answer

Year 1 2 3 4 5 Sales (Unit) 75000 85000 80000 70000 65000 Unit Price 240 240 240 240 240 Sales 18000000 20400000 19200000 16800000 15600000 Less : Fixed costs -2100000 -2100000 -2100000 -2100000 -2100000 15900000 18300000 17100000 14700000 13500000 Depreciation(10.5-1.1)/5 1880000 1880000 1880000 1880000 1880000 EBT 14020000 16420000 15220000 12820000 11620000 Tax @ 30% 4206000 4926000 4566000 3846000 3486000 EAT 9814000 11494000 10654000 8974000 8134000 Add: Depreciation 1880000 1880000 1880000 1880000 1880000 Free cash flow 11694000 13374000 12534000 10854000 10014000 NWC Beg 0 3960000 4488000 4224000 3696000 End 3960000 4488000 4224000 3696000 3432000 NWC CF -3960000 -528000 264000 528000 264000 Net CF 7734000 12846000 12798000 11382000 10278000 Salvage 1100000 Taxes @ 30% 330000 Salvage CF 770000 Year Cash Flow Discount factor @ 10% Present Value 0 -10800000 1 -10800000 1 7734000 0.909091 7030909.1 2 12846000 0.826446 10616529 3 12798000 0.751315 9615326.8 4 11382000 0.683013 7774059.1 5 11048000 0.620921 6859938.8 NPV 31096763

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