Kelly’s Kite Shop, Inc. is thinking of expanding their operations by buying a ne

Question

Kelly’s Kite Shop, Inc. is thinking of expanding their operations by buying a new machine that designs special aerodynamic cloths for high-end kite flyers. This machine is expected to be operational for four years. During the first year, they expect sales to be $165,000. Further, they expect that over the remaining three years of the project, the sales amount can be increased by 10% each subsequent year. After an in-depth analysis, they have also concluded that costs for the project should always be approximately 55% of sales for each year. Further, the machine is going to be depreciated as a MACRS 3-year property class.

The actual machine will cost $175,000, but Kelly will also have to increase inventories and hire an additional employee to run the machine. Therefore, NWC will have to increase by $60,000 as well. However, you will recover 60% of the increase at the completion of the project. In addition, you feel you can sell the machine for $25,000 at the end.

Using all the above information, complete the following table. Round to the nearest dollar. The more work you can neatly show me, the more points you will get in case you have an error. (20 points)

Year 0

Year 1

Year 2

Year 3

Year 4

OCF

NCS

Change in NWC

NCF

What is the NPV of this project, given k = 10%? Should you accept or reject? (10 points)

What is the discounted payback period of the project, given k =10%. Round this to 2 decimal places. Should you accept or reject? (10 pts)

Year 0

Year 1

Year 2

Year 3

Year 4

OCF

NCS

Change in NWC

NCF

Explanation / Answer

NOTE-

AS THER IS NO TAX ADVANTAGE ON DEPERICATION AND IT IS ALSO A NON CASH ITEM , IT IS NOT TAKEN INTO CONSIDERATION.

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DISCOUNTED PAY BACK PERIOD

= 3 YEARS + [($32504.43) / $109161.67]

= 3 + 0.30

= 3.3 YEARS

DETAILS YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 PURCHASE PRICE ($175000) NA NA NA NA INCEREASE IN NWC ($60000) NA NA NA NA ANNUAL SALES NA $165000 $181500 $199650 $219615 ANNUAL COST NA ($90750) ($99825) ($109807.50) ($120788.25) RECAPTURE OF NWC NA NA NA NA $36000 SALVAGE VALUE NA NA NA NA $25000 NET CASH FLOW ($235000) $74250 $81675 $89842.5 $159826.75

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