Vandelay Industries is evaluating a project that costs $1,350,000 and has a 20 y
ID: 2714983 • Letter: V
Question
Vandelay Industries is evaluating a project that costs $1,350,000 and has a 20 year life. Depreciation will be straight-line to zero over the life of the project. Management believes they will be able to sell the equipment at the end of the project for $50,000. Sales are projected to be 50,000 units in the first year, 70,000 units in the second year, and 25,000 units for all additional years. Price per unit is $34.50, variable cost per unit is $15.50 and fixed costs are $300,000 per year. The project also requires an initial investment in net working capital of $150,000 and for the project to maintain a net working capital balance equal to $150,000 plus 15% of sales while the project is ongoing. All net working capital will be recouped at the end of the project. This project will have an additional spillover effect that will impact existing sales negatively. The net pre-tax impact of the spillover effect will be -$75,000 per year. This project will also have a positive spillover effect. Specifically, the project will generate additional sales of 100 units of an existing product at a price of $15 each. The existing product has variable costs of $9 and fixed costs of $5,000 per year. The company’s marginal tax rate is 35%. The required return on similar projects is 11%. What is the project’s NPV? What is the project’s payback period? What is the project’s profitability index? What is the project’s IRR? Why might this company decide to pursue this project? Would you be please answer in this format NPV... Payback period.. Profitability Index.. and so on also Please explain your answer in details
Explanation / Answer
PV of cash flow = Cashflow/(1+i)^n
i = required rate of return and n is the number of period.
IRR is the rate at which NPV is 0.
Year Costs Units sales Price per unit Revenue Variable cost @ $15.5 per unit Fixed cost Depreciation Tax benefit on depreciation Salvage value Woking capital Working capital Spill over effect Spill over effect with additional sales Cash flow PV @ 11% 0 (1,350,000) (150,000) (1,500,000) (1,500,000.00) 1 50,000 34.50 1,725,000 (775,000) (300,000) (65,000) 22,750 (258,750) (75,000) (4,400) 269,600 242,882.88 2 70,000 34.50 2,415,000 (1,085,000) (300,000) (65,000) 22,750 (362,250) (75,000) (4,400) 546,100 443,227.01 3 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (55,588.82) 4 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (50,080.02) 5 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (45,117.14) 6 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (40,646.07) 7 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (36,618.08) 8 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (32,989.26) 9 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (29,720.06) 10 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (26,774.82) 11 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (24,121.46) 12 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (21,731.05) 13 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (19,577.52) 14 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (17,637.41) 15 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (15,889.56) 16 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (14,314.91) 17 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (12,896.32) 18 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (11,618.31) 19 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 (129,375) (75,000) (4,400) (76,025) (10,466.94) 20 25,000 34.50 862,500 (387,500) (300,000) (65,000) 22,750 50,000 (129,375) 3,099,750 (75,000) (4,400) 3,073,725 381,246.12 NPV (898,431.74) IRR 3.14%Related Questions
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