Data In order to produce the new product, Vitasoy will acquire new equipment at
ID: 2808197 • Letter: D
Question
Data In order to produce the new product, Vitasoy will acquire new equipment at a cost of $5 million It will depreciate this capital expenditure over the 5 years of this project on a straight line basis This means the project will have an annual depreciation expense of $5M Annual Depreciation =-= -$1M The new energy drink is expected to be marketed for 5 years. Over those 5 years, Vitasoy projects the following sales figures End of Year Units Sold (in 000s) 5000 7000 10000 8000 4000 Av. Price Per Unit 1.60$1.60 $1.75 $1.75 $1.75 Sale (in $000s) $8,000 $11,200 $17,500 $14,000 $7,000 In terms of costs, Vitasoy projects the following: Gross Profit Margin: 25%. This means that it expects the cost of producing each can (COGS) to be 75% of the sale price. ·Operating Expenses: 6% of sales (listed as selling, general, and administrative) Corporate Tax Rate: 40% . Opportunity Cost of Capital: 10% In terms of Net Working Capital, Vitasoy projects the following: . Cash: 2% of sales . Inventory: 3% of sales . Receivables: 15% of sales Payables: 15% of cost of COGS » Year 5: Assume all four items go back to zeroExplanation / Answer
Initial Cost $5,000,000 Annual depreciation $1,000,000 Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=Opportunity cost of capital=10%=0.1 N=Year of Cash Flow N Year 0 1 2 3 4 5 I InitialCashFlow for equipment ($5,000,000) A Sale $8,000,000 $11,200,000 $17,500,000 $14,000,000 $7,000,000 B=0.75*A Cost of goods sold (COGS) $6,000,000 $8,400,000 $13,125,000 $10,500,000 $5,250,000 C=0.06*A Operating expenses $480,000 $672,000 $1,050,000 $840,000 $420,000 D Depreciation $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 E=A-B-C-D Before tax income $520,000 $1,128,000 $2,325,000 $1,660,000 $330,000 F=E*0.4 Income tax $208,000 $451,200 $930,000 $664,000 $132,000 G=E-F Net Income $312,000 $676,800 $1,395,000 $996,000 $198,000 H=G+D Cash Inflow $1,312,000 $1,676,800 $2,395,000 $1,996,000 $1,198,000 WORKING CAPITAL: J Cash(2%0f sales) $160,000 $224,000 $350,000 $280,000 $140,000 $0 K Inventory(3% of sales) $240,000 $336,000 $525,000 $420,000 $210,000 $0 L Receivable (15%of sales) $1,200,000 $1,680,000 $2,625,000 $2,100,000 $1,050,000 $0 M Payable (15%of COGS) $900,000 $1,260,000 $1,968,750 $1,575,000 $787,500 $0 P=J+K+L-M Net Working Capital $700,000 $980,000 $1,531,250 $1,225,000 $612,500 $0 Q Cash Flow due to net working capital ($700,000) ($280,000) ($551,250) $306,250 $612,500 $612,500 R=I+H+Q TOTAL NET CASH FLOW ($5,700,000) $1,032,000 $1,125,550 $2,701,250 $2,608,500 $1,810,500 SUM PV=R/(1.1^N) Present value of Total Net Cash Flow $ (5,700,000) $ 938,182 $ 930,207 $ 2,029,489 $ 1,781,641 $ 1,124,178 $ 1,103,696 NPV=Sum of PV Net Present Value (NPV) $ 1,103,696 ALTERNATIVE PROCESS N Year 0 1 2 3 4 5 I InitialCashFlow for equipment ($5,000,000) A Sale $8,000,000 $11,200,000 $17,500,000 $14,000,000 $7,000,000 B Cost of goods sold (COGS)(80% Year1 and 2) (70% year3&4)(75% in year 5) $6,400,000 $8,960,000 $12,250,000 $9,800,000 $5,250,000 C=0.06*A Operating expenses $480,000 $672,000 $1,050,000 $840,000 $420,000 D Depreciation $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 E=A-B-C-D Before tax income $120,000 $568,000 $3,200,000 $2,360,000 $330,000 F=E*0.4 Income tax $48,000 $227,200 $1,280,000 $944,000 $132,000 G=E-F Net Income $72,000 $676,800 $1,395,000 $996,000 $198,000 H=G+D Cash Inflow $1,072,000 $1,676,800 $2,395,000 $1,996,000 $1,198,000 WORKING CAPITAL: J Cash(2%0f sales) $160,000 $224,000 $350,000 $280,000 $140,000 $0 K Inventory(3% of sales) $240,000 $336,000 $525,000 $420,000 $210,000 $0 L Receivable (15%of sales) $1,200,000 $1,680,000 $2,625,000 $2,100,000 $1,050,000 $0 M Payable (15%of COGS) $960,000 $1,344,000 $1,837,500 $1,470,000 $787,500 $0 P=J+K+L-M Net Working Capital $640,000 $896,000 $1,662,500 $1,330,000 $612,500 $0 Q Cash Flow due to net working capital ($640,000) ($256,000) ($766,500) $332,500 $717,500 $612,500 R=I+H+Q TOTAL NET CASH FLOW ($5,640,000) $816,000 $910,300 $2,727,500 $2,713,500 $1,810,500 SUM PV=R/(1.1^N) Present value of Total Net Cash Flow ($5,640,000) $741,818 $752,314 $2,049,211 $1,853,357 $1,124,178 $880,878 NPV=Sum of PV Net Present Value (NPV) $880,878 ALTERNATIVE PROCESS IS NOT RECOMMENDED SINCE THE NPV IS LOWER SALVAGE VALUE Projected Salavage Value $2,200,000 AnnualDepreciation $ 625,000 (5000000)/8 N Year 0 1 2 3 4 5 I InitialCashFlow for equipment ($5,000,000) A Sale $8,000,000 $11,200,000 $17,500,000 $14,000,000 $7,000,000 B=0.75*A Cost of goods sold (COGS) $6,000,000 $8,400,000 $13,125,000 $10,500,000 $5,250,000 C=0.06*A Operating expenses $480,000 $672,000 $1,050,000 $840,000 $420,000 D Depreciation $ 625,000 $625,000 $625,000 $625,000 $625,000 E=A-B-C-D Before tax income $895,000 $1,503,000 $2,700,000 $2,035,000 $705,000 F=E*0.4 Income tax $358,000 $601,200 $1,080,000 $814,000 $282,000 G=E-F Net Income $537,000 $901,800 $1,620,000 $1,221,000 $423,000 H=G+D Cash Inflow $1,162,000 $1,526,800 $2,245,000 $1,846,000 $1,048,000 Q Cash Flow due to net working capital ($700,000) ($280,000) ($551,250) $306,250 $612,500 $612,500 Terminal Cash Flow Due toSalvage S Accumulated Depreciation $ 625,000 $ 1,250,000 $ 1,875,000 $ 2,500,000 $ 3,125,000 T=5000000-S BookValue at the end of year $ 4,375,000 $ 3,750,000 $ 3,125,000 $ 2,500,000 $ 1,875,000 U Salvage Value $2,200,000 V=U-T Gain on Sale $325,000 W=V*0.4 Tax on Gain $130,000 X=U-W TerminalCash flow on Salvge $2,070,000 R=I+H+Q+X TOTAL NET CASH FLOW ($5,700,000) $882,000 $975,550 $2,551,250 $2,458,500 $3,730,500 SUM PV=R/(1.1^N) Present value of Total Net Cash Flow $ (5,700,000) $ 801,818 $ 806,240 $ 1,916,792 $ 1,679,189 $ 2,316,347 $ 1,820,385 NPV=Sum of PV Net Present Value (NPV) $ 1,820,385
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