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 8,300 in the first year, with growth of 4 percent each year for the following four years (Years 2 through 5). Production of these lamps will require $48,000 in networking capital to start. Total fixed costs are $108,000 per year, variable production costs are $16 per unit, and the units are priced at $44 each. The equipment needed to begin production will cost $188,000. 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 39 percent, and the required rate of return is 25 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.)

Explanation / Answer

Year 0 year 1 year2 year 3 year 4 year 5 Units per year 8300 8632 8977.28 9336.371 9709.826 Price per unit 44 44 44 44 44 Sales 365200 379808 395000.3 410800.3 427232.3 Fixed cost 108000 108000 108000 108000 108000 Variabl cost 132800 138112 143636.5 149381.9 155357.2 Dpreciation 37600 37600 37600 37600 37600 PBT 86800 96096 105763.8 115818.4 126275.1 TAX 33852 37477.44 41247.9 45169.17 49247.3 PAT 52948 58618.56 64515.94 70649.22 77027.83 PAT + Dep 90548 96218.56 102115.9 108249.2 114627.8 Inv Machine -188000 Networking Capital -48000 Release of WC 48000 Cashflows -236000 90548 96218.56 102115.9 108249.2 162627.8 38,344

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