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 8,100 in the first year, with growth of 5 percent each year for the following four years (Years 2 through 5). Production of these lamps will require $46,000 in networking capital to start. Total fixed costs are $106,000 per year, variable production costs are $12 per unit, and the units are priced at $40 each. The equipment needed to begin production will cost $186,000. 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 20 percent.

What is the NPV of this project?

Explanation / Answer

Year 1 Year 2 Year 3 Year 4 Year 5 Sales in Unit 8100 8505 8930 9377 9846 Contribution Per Unit 28 28 28 28 28 Total Contribution 226800 238140 250047 262556 275688 Total fixed costs 106000 106000 106000 106000 106000 Depreciation 37200 37200 37200 37200 37200 PBT 83600 94940 106847 119356 132488 Less Tax 33440 37976 42738.8 47742.4 52995.2 Net Income 50160 56964 64108 71614 79493 Add depreciation 37200 37200 37200 37200 37200 Operating cash Flow 87360 94164 101308 108814 116693 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Equipment cost -186000 Net working capital -46000 46000 Operating cash Flow 87360 94164 101308 108814 116693 Net Cash flow -232000 87360 94164 101308 108814 162693 PV factor 20% 1 0.833333 0.694444 0.578704 0.482253 0.401878 Present value -232000 72800 65391.67 58627.43 52475.69 65382.59 NPV 82677.38

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