SI Inc has an investment opportunity to produce baseball caps. The required initial investment on equipment is $9,000. The firm will depreciate the equipment on a straightline basis to zero salvage value over the three-year life of the project. The equipment can be sold at the end of the project life for 30% of its purchase price. Sales is expected to be $7,000 each year and the variable costs are expected to be 40% of the sales revenue each year. Fixed costs will be $500 each year. Interest expense will be $600 each year. The firm has already incurred $1,800 on the initial marketing feasibility study for this project. An investment in working capital of $400 is required at the start of the project. Subsequently, the total working capital investment will be 10% of sales. Investment in working capital is fully recovered in the final year of the project. If the firm takes on this project, the cash flows from the firm’s existing division will decrease by $300 each year. Calculate the NPV of this project if the required rate of return is 10%. The firm’s tax rate is 21%.
Tax = 12% | 0 | 1 | 2 | 3 |
RoR = 10% | Year 0 | Year 1 | Year 2 | Year 3 |
Equipment | -9000 | |||
Depreciation | 3000 | 3000 | 3000 | |
Salvage (30%) | 2700 | |||
Sales Revenue | 7000 | 7000 | 7000 | |
Variable cost (40%) | -2800 | -2800 | -2800 | |
Fixed Cost | -500 | -500 | -500 | |
Intrest Expense | -600 | -600 | -600 | |
Marketing Project | -1800 | |||
Initial working capital | -400 | |||
Working Capital (10%) | -700 | -700 | -700 | |
Decrease in cash flow | -300 | -300 | -300 | |
Depreciation Tax benefit | 360 | 360 | 360 | |
Total | -11200 | 2460 | 2460 | 5160 |
NPV | -11200 | 2236 | 2033.1 | 3877 |
NPV Total | -3054 |
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