With the growing popularity of casual surf print clothing, two recent MBA gradua

Question

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps to accent people’s homes. They projected unit sales of these lamps to be 7,500 in the first year, with growth of 7 percent each year for the next five years. Production of these lamps will require $40,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $100,000 per year, variable production costs are $20 per unit, and the units are priced at $48 each. The equipment needed to begin production will cost $180,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 35 percent, and the required rate of return is 24 percent. What is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).)

  

  NPV $

Explanation / Answer

Answer: NPV=$264992.27

Calculation of NPV:

Years 0 1 2 3 4 5 Units (A) 7500.00 8025.00 8586.75 9187.82 9830.97 Unit Price (B) 48.00 48.00 48.00 48.00 48.00 Variable cost (c ) 20.00 20.00 20.00 20.00 20.00 Contribution cost (D=B-C) 28.00 28.00 28.00 28.00 28.00 Contribution ($) (D*A) 210000.00 224700.00 240429.00 257259.03 275267.16 Less: Fixed cost 100000.00 100000.00 100000.00 100000.00 100000.00 Less: Depreciation (180000/5) 36000.00 36000.00 36000.00 36000.00 36000.00 EBIT 74000.00 88700.00 104429.00 121259.03 139267.16 Less: tax @ 35% 25900.00 31045.00 36550.15 42440.66 48743.51 EAT 48100.00 57655.00 67878.85 78818.37 90523.66 Add: Depreciation 36000.00 36000.00 36000.00 36000.00 36000.00 OCF 84100.00 93655.00 103878.85 114818.37 126523.66 Net working capital -40000.00 Equipment cost -180000.00 Total cash Flows -220000.00 84100.00 93655.00 103878.85 114818.37 126523.66 P.V.F (24%) 1.00 0.98 0.95 0.93 0.91 0.89 PV ($) -220000.00 82128.91 89316.37 96744.72 104426.70 112375.58 NPV 264992.27

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