A cosmetic company is considering introducing a new lotion. The manufacturing eq

Question

A cosmetic company is considering introducing a new lotion. The manufacturing equipment will cost

$560,000. The expected life of the equipment is 8 years. The company is thinking of selling the lotion in a

single standard pack of 50 grams at $10 each pack. It is estimated that variable cost per pack would be

$5 and annual fixed cost $200,000. Fixed cost includes (straight line) depreciation of $70,000. The

company expects to sell 100,000 packs of the lotion each year. The tax rate is 30%    What is NPV?

Explanation / Answer

Calculation of NPV:

Particulars Amount ($) Total Sales (100,000 x $10) 10,00,000 Less: Variable Cost (1,00,000 x $5) 5,00,000 Contribution 5,00,000 Less; Fixed cost 2,00,000 Profit 3,00,000 Tax @ 30% 90,000 Profit after Tax 2,10,000 Depreciation 70,000 Cash flow after Tax per year 2,80,000 Total Cash flow after tax(2,80,000 x 8) 22,40,000 Initial Investment 10,00,000 NPV 12,40,000

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