Hoosier Camper, Inc. is a manufacturer of truck campers. Its current line of tru
ID: 2713633 • Letter: H
Question
Hoosier Camper, Inc. is a manufacturer of truck campers. Its current line of truck campers are selling excellently. However, in order to cope with the foreseeable competition with other similar truck campers, HC spent $950,000 to develop a new line of deluxe truck campers that are more spacious. In addition, the deluxe truck campers are much lighter with LED lighting, aerodynamic front nose-cap, a one-piece fiberglass wet bath, expansive storage in the cab and some other highend features. The company had also spent a further $250,000 to study the marketability of this new model. HC is able to produce the new model at a variable cost of $4,750 each. The total fixed costs for the operation are expected to be $2,850,000 per year. HC expects to sell 20,000 campers, 25,000 campers, 18,000 campus, 16,500 campers and 12,500 campers of the new deluxe model per year over the next five years respectively. They will be selling at a price of $18,000 each. To launch this new line of production, HC needs to invest $500,000,000 in equipment which will be depreciated on a seven-year MACRS schedule. The value of the used equipment is expected to be worth $1,250,000 as at the end of the 5 year project life. HC is planning to stop producing the existing model entirely in two years. Should HC not introduce the new deluxe model, sales per year of the existing model will be 12,000 campers and 10,000 campers for the next two years respectively. The existing model can be produced at variable costs of $3,260 each and total fixed costs of $1,450,000 per year. They are selling for $14,500 each. If HC produces the new deluxe model, sales of the existing model will be eroded by 5,000 campers for next year and 6,000 campers for the year after next. In addition, to promote sales of the existing model alongside with the new deluxe model, HC has to reduce the price of the existing model to $11,000 each. Net working capital for the new deluxe model will be 15 percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year 1 according to the sales of the year. HC is currently in the tax bracket of 35 percent and it requires a 14 percent returns on all of its projects. You have just been hired by HC as a financial consultant to advise them on this new deluxe truck camper project. You are expected to provide answers to the following questions to their management by their next meeting which is scheduled sometime next month.
6. What is the NPV (net present value) of the project? (10 points)
Explanation / Answer
Solution,
For Calculating NPV we need to first calculate Incremental cashflow i.e. incremental Investment & incremental cash inflows out of new line
1. Cash flow will be as follow
Particulars year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Cost : Development cost -9,50,000 Marketing cost -2,50,000 Investment in Equipment -50,00,00,000 Tax Benefit on marketing cost & Development cost @ 35% (inflow) 4,20,000 Working capital (15% of sales) ( 20000 x 18000) 5,40,00,000 Inflow from Sale at five years 12,50,000 Total Initial Cost (A) -50,12,00,000 5,44,20,000 - - - 12,50,000 Cash inflow from existing Line Year 1 Year 2 Year 3 Year 4 Year 5 Volumes ( reduced by 5k & 6K respectively) 6000 4000 Contribution(11,000 - 3260) per camper 7740 7740 Total Contribution 4,64,40,000 3,09,60,000 Fixed Cost -14,50,000 -14,50,000 Net Inflow 4,49,90,000 2,95,10,000 Tax @35 % -1,57,46,500.00 -1,03,28,500.00 Toal Inflow from Existing Line (B) 2,92,43,500.00 1,91,81,500.00 Cash inflow from New Line Year 1 Year 2 Year 3 Year 4 Year 5 Volumes 20000 25000 18000 16500 12500 Contribution(18,000 - 4750) per camper 13250 13250 13250 13250 13250 Total Contribution 26,50,00,000 33,12,50,000 23,85,00,000 21,86,25,000 16,56,25,000 Fixed Cost -28,50,000 -28,50,000 -28,50,000 -28,50,000 -28,50,000 Net Inflow 26,21,50,000 32,84,00,000 23,56,50,000 21,57,75,000 16,27,75,000 Tax @35 % -9,17,52,500 -11,49,40,000 -8,24,77,500 -7,55,21,250 -5,69,71,250 Tax Benefit on Depreciation (35% of Depre) 2,50,07,500 4,28,57,500 3,06,07,500 2,18,57,500 1,56,27,500 Toal Inflow from New Line (C ) 19,54,05,000 25,63,17,500 18,37,80,000 16,21,11,250 12,14,31,250 Depreciation Year 1 Year 2 Year 3 Year 4 Year 5 Cost of Equipment 50,00,00,000 Rate as per MACR schedule for 7 year 14.29% 24.49% 17.49% 12.49% 8.93% ( refer MACR table) Depreciation 7,14,50,000 12,24,50,000 8,74,50,000 6,24,50,000 4,46,50,000 Value at the end 42,85,50,000 30,61,00,000 21,86,50,000 15,62,00,000 11,15,50,000 Now adding (A+B+C) year 0 Net Cashflow -50,12,00,000 27,90,68,500 27,54,99,000 18,37,80,000 16,21,11,250 12,26,81,250 PVF @14% 1 0.877192982 0.769467528 0.674971516 0.592080277 0.519368664 Present Value -50,12,00,000 24,47,96,930 21,19,87,535 12,40,46,265 9,59,82,874 6,37,16,797 adding all NPV is 23,93,30,401Related Questions
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