Question

We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows: Year Unit Sales 1 99,500 2 111,500 3 134,500 4 140,500 5 93,500 The new system will be priced to sell at $460 each. The cockroach eradicator project will require $1,900,000 in net working capital to start, and total net working capital will rise to 15% of the change in sales. The variable cost per unit is $330, and total fixed costs are $2,200,000 per year. The equipment necessary to begin production will cost a total of $21 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20%. In five years, this equipment will actually be worth about 20% of its cost. The relevant tax rate is 35%, and the required return is 14%. Based on these preliminary estimates, what is the NPV of the project?

NPV

Answer 1

	1	2	3	4	5
Units sold	99500	111500	134500	140500	93500		Sale Price	460
Contribution	12935000	14495000	17485000	18265000	12155000		Variable cost	330
							Contribution	130
Dep	3360000	3360000	3360000	3360000	3360000
Net working capital	1900000	2185000	2512750	2889663	3323112		Equipment	21000000
							Scrap Value	4200000
Profit	7675000	8950000	11612250	12015338	5471888		Dep per year	3360000
Tax@35%	2686250	3132500	4064288	4205368	1915161
PAT	4988750	5817500	7547963	7809969	3556727
PV factor@14%	0.877193	0.769468	0.674972	0.59208	0.519369
PV	4376096	4476377	5094660	4624129	1847253
NPV	20418515