The following table presents sales forecasts for Useless China Giftware. The uni
ID: 2823737 • Letter: T
Question
The following table presents sales forecasts for Useless China Giftware. The unit price is $40. The unit cost of the giftware is $25.
It is expected that net working capital will amount to 25% of sales in the following year. For example, the store will need an initial (year 0) investment in working capital of .25 × 22,000 × $40 = $220,000.
Plant and equipment necessary to establish the giftware business will require an additional investment of $200,000. This investment will be depreciated in an asset class with a CCA rate of 25%.
We will assume that the firm has other assets in this asset class. After 4 years, the equipment will have an economic and book value of zero. The firm’s tax rate is 35%. The discount rate is 20%.
What is the net present value of the project?
Year Unit Sales 1 22,000 2 28,000 3 16,000 4 5,000 Thereafter 0Explanation / Answer
Year Cash outflow GP Depre IBT NI (IBT*0.65) CF=NI+Dep discount 20% PV 0 -420000 -420000 1 -420000 1 22000*(40-25)=330000 50000 280000 182000 232000 0.833 193256 2 28000*(40-25)=420000 50000 370000 240500 290500 0.694 201607 3 240000 50000 190000 123500 173500 0.579 100456.5 4 75000 50000 25000 16250 66250 0.482 31932.5 WC 220000 0.482 106040 NET PRESENT VALUE OF THE PROJECT= 213292
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