PLEASE EXPLAIN AND SHOW STEPS ON FINANCIAL CALCULATOR AS WELL. With the growing

Question

PLEASE EXPLAIN AND SHOW STEPS ON FINANCIAL CALCULATOR AS WELL.

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 7,800 in the first year, with growth of 8 percent each year for the following four years (Years 2 through 5). Production of these lamps will require $43,000 in networking capital to start. Total fixed costs are $103,000 per year, variable production costs are $25 per unit, and the units are priced at $50 each. The equipment needed to begin production will cost $183,000. 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 40 percent, and the required rate of return is 22 percent. What is the NPV of this project?

Explanation / Answer

Year 1 Year 2 Year 3 Year 4 Year 5 Projected Units Sales 7800 8424 9098 9826 10612 Sale Price per unit $50 $50 $50 $50 $50 Sales Revenue $390,000 $421,200 $454,896 $491,288 $530,591 Less : Variable Costs 195000 210600 227448 245643.8 265295.3 Fixed Costs $103,000 $103,000 $103,000 $103,000 $103,000 Depreciation (183000/5) 36600 36600 36600 36600 36600 Net Income before Tax $55,400 $71,000 $87,848 $106,044 $125,695 Tax @ 40% $22,160 $28,400 $35,139 $42,418 $50,278 Net Income $33,240 $42,600 $52,709 $63,626 $75,417 Add : Depreciation 36600 36600 36600 36600 36600 Free Cash flow $69,840 $79,200 $89,309 $100,226 $112,017 Purchase of Equipment ($183,000) Networking Capital ($43,000) $43,000 Cash flow ($226,000) $69,840 $79,200 $89,309 $100,226 $155,017 Discount factor @ 22% (1/(1.22^n) 1 0.819672 0.671862 0.550707 0.451399 0.369999 ($226,000) $57,246 $53,212 $49,183 $45,242 $57,356 Net Present Value $36,238.69 Net Present Value of the project is $ 36238.69

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