Create a spreadsheet showing the annual net income, cash flows, and net present

Question

Create a spreadsheet showing the annual net income, cash flows, and net present value of the project. Use the absorption costing method for your annual income statements. Once you have net income computed, convert your net income to cash flow by adding back to net income any non-cash expenses. When annual cash flows are computed you are ready to find the present value of each of those annual cash flows. Add your present values together and net with the initial costs/startup costs to find the net present value. The Ebitts Field Corporation manufactures baseball gloves. Charlie Botz, the company's top salesperson, has recommended expanding into the baseball bat business. He put together a project proposal that includes the following information: New production equipment will cost $75,000 and will be depreciated using the straight-line method over 5 years. This equipment can be sold for $10,000 at the end of the project (year 6) . Setting up production and establishing distribution channels will have a $300,000 start up cost. These expenses are deductible for tax purposes. . . The unit sales forecast for baseball bats is as follows Aluminum Wood bats bats 6,000 9,000 15,000 Year 1 Year 2 Year 3 Year 418,000 Year 5 Year 6 8.000 12,000 14,000 20,000 22,000 24,000 20,000 22,000 The company expects manufacturing costs to be $11 per unit for aluminum bats and S9 per unit for wood bats. The expected gross margin is $7 per unit for aluminum bats and $3 per unit for wood bats . . Other expenses associated with the project are estimated at $20,000 per year during the first 2 years and $40,000 per year for the last 4 years. The company has enough available space in their existing manufacturing facility that has no alternative use at this time. The company has a marginal tax rate of 35%. Use a 12% rate of return for your present value calculations. .

Explanation / Answer

Calculation of Net Present Value

Step -1

Calculation of Cashflow after tax and Depreciation

Calculation of Net Present Value (NPV)

Net Present Value (NPV) = 20,960

Decision : Since Net Present Value is Positive (i.e 20,960) so Project is accepted.

Particulars 1 2 3 4 5 6 Aluminium Bats Number of Units(A) 6000 9000 15000 18000 20000 22000 Gross Proft of Aluminium Bats (B=A*7) 42,000 63,000 105,000 126,000 140,000 154,000 Wooden Bats Number of Units (C) 8000 12000 14000 20000 22000 24000 Gross Profit Wooden bats (D=C*3) 24,000 36,000 42,000 60,000 66,000 72,000 Total Gross Profit (E=B+D) 66,000 99,000 147,000 186,000 206,000 226,000 Less : Expenses (F) 20,000 20,000 40,000 40,000 40,000 40,000 Cash Flow befor Depreciation and Taxes(G=E-F) 46,000 79,000 107,000 146,000 166,000 186,000 Less : Depreciation ((75000)/5+(300000)/6=65000(H) 65,000 65,000 65,000 65,000 65,000 65,000 Cash Flow before Tax(I=H-G) -19,000 14,000 42,000 81,000 101,000 121,000 Less : Tax @ 35%(J) (Loss Set Off against the Profit) 12950(37000*35%(Loss set off against the Profit) 28,350 35,350 42,350 Cash Flow After tax (K=J-I) -19,000 14,000 29,050 52,600 65,650 78,650 Add:Depreciation(L) 65,000 65,000 65,000 65,000 65,000 65,000 Add:Salvage Value After Tax (10000*65%)(M) 6500 Cash Flow After Tax and Depreciation 46,000 79,000 94,050 117,650 130,650 150,150

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