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 7,000 in the first year, with the growth of 8 percent each year for the next five years. Production of these lamps will require GH¢35,000 in net working capital to start. Total fixed costs are GH¢ 95,000 per year, variable production costs are GH¢ 20 per unit, and the units are priced at GH¢48 each. The equipment needed to begin production will cost GH¢175,000. 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 34 percent, and the required rate of return is 25 percent. Evaluate the project using NPV.

Answer 1

The whole solution is described in the excel snippet above