Emmett Brown Technologies, Inc. (EBT), projects unit sales for a new gasoline-ru
ID: 2733357 • Letter: E
Question
Emmett Brown Technologies, Inc. (EBT), projects unit sales for a new gasoline-run flux capacitor as follows:
Production of the flux capacitors will require $1,570,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. At the completion of the project, the company will have to recover all NWC it still has in the project. Total fixed costs are $1,470,000 per year, variable production costs are $250 per unit, and the units are priced at $365 each. The equipment needed to begin production has an installed cost of $20,700,000. Because the flux capacitors are intended for professional loopers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 15 percent of its acquisition cost. EBT is in the 30 percent marginal tax bracket and has a required return on all its projects of 17 percent. Refer to Table 10.7.
What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What is the IRR? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Emmett Brown Technologies, Inc. (EBT), projects unit sales for a new gasoline-run flux capacitor as follows:
Explanation / Answer
Initial Investment = Installed Cost + Net Working Capital required
=> $20,700,000 + $1,570,000 = $22,270,000
7 Years Depreciation Schedule
Year
Basis
%
Depreciation Expense
Accumulated Depreciation
Ending Book Value
1
$20,700,000.00
14.286%
$2,957,202.00
$2,957,202.00
$17,742,798.00
2
$20,700,000.00
24.490%
$5,069,430.00
$8,026,632.00
$12,673,368.00
3
$20,700,000.00
17.493%
$3,621,051.00
$11,647,683.00
$9,052,317.00
4
$20,700,000.00
12.495%
$2,586,465.00
$14,234,148.00
$6,465,852.00
5
$20,700,000.00
8.925%
$1,847,475.00
$16,081,623.00
$4,618,377.00
6
$20,700,000.00
8.925%
$1,847,475.00
$17,929,098.00
$2,770,902.00
7
$20,700,000.00
8.925%
$1,847,475.00
$19,776,573.00
$923,427.00
8
$20,700,000.00
4.462%
$923,634.00
$20,700,207.00
-$207.00
Salvage Value of Machine = $20,700,000 x 15% = $3,105,000
Revenue = Sales Price Per Unit x Units sold
Variable Cost = Variable cost per unit x Units sold
Operating Cash Flow
Year
1
2
3
4
5
Revenue
$28,470,000
$33,215,000
$38,325,000
$36,500,000
$29,565,000
Less: Variable Cost
$19,500,000
$22,750,000
$26,250,000
$25,000,000
$20,250,000
Less: Fixed Cost
$1,470,000
$1,470,000
$1,470,000
$1,470,000
$1,470,000
Less: Depreciation
$2,957,202
$5,069,430
$3,621,051
$2,586,465
$1,847,475
EBT
$4,542,798
$3,925,570
$6,983,949
$7,443,535
$5,997,525
Less: Tax @ 30%
$1,362,839
$1,177,671
$2,095,185
$2,233,061
$1,799,258
Net Income
$3,179,959
$2,747,899
$4,888,764
$5,210,475
$4,198,268
Less: Additional NWC
$0
$474,500
$511,000
-$182,500
-$693,500
Add: Depreciation
$2,957,202
$5,069,430
$3,621,051
$2,586,465
$1,847,475
Add: Salvage Value
$0
$0
$0
$0
$3,105,000
Add: Recovery of NWC
$0
$0
$0
$0
$1,570,000
Operating Cash Flow
$6,137,161
$7,342,829
$7,998,815
$7,979,440
$11,414,243
NPV = -$22,270,000 + ($6,137,161/1.17) + ($7,342,829,/1.172) + ($7,998,815/1.173) + ($7,979,440/1.174) + ($11,414,243/1.175) = $2,798,089.48
IRR:
0 = -$22,270,000 + ($6,137,161/(1+IRR)) + ($7,342,829/(1+IRR)2) + ($7,998,815/(1+IRR)3) + ($7,979,440/(1+IRR)4) + ($11,414,243/(1+IRR)5)
IRR = 21.85%
7 Years Depreciation Schedule
Year
Basis
%
Depreciation Expense
Accumulated Depreciation
Ending Book Value
1
$20,700,000.00
14.286%
$2,957,202.00
$2,957,202.00
$17,742,798.00
2
$20,700,000.00
24.490%
$5,069,430.00
$8,026,632.00
$12,673,368.00
3
$20,700,000.00
17.493%
$3,621,051.00
$11,647,683.00
$9,052,317.00
4
$20,700,000.00
12.495%
$2,586,465.00
$14,234,148.00
$6,465,852.00
5
$20,700,000.00
8.925%
$1,847,475.00
$16,081,623.00
$4,618,377.00
6
$20,700,000.00
8.925%
$1,847,475.00
$17,929,098.00
$2,770,902.00
7
$20,700,000.00
8.925%
$1,847,475.00
$19,776,573.00
$923,427.00
8
$20,700,000.00
4.462%
$923,634.00
$20,700,207.00
-$207.00
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