Question

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The...

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $30.

Year Unit Sales

1) 36,000

2 ) 44,000

3) 13,000

4) 7,000

Thereafter) 0

It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year 0) investment in working capital of .20 × 36,000 × $40 = $288,000. Plant and equipment necessary to establish the giftware business will require an additional investment of $214,000. This investment will be depreciated straight-line over 3 years. After 4 years, the equipment will have an economic and book value of zero. The firm’s tax rate is 30%. The discount rate is 15%.

a. What is the net present value of the project? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

a)Net Present Value:?$

b)Increase in NPV:?$

Homework Answers

Answer #1

a) NPV = $ 282295

b) Increase in NPV = $ 25123

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