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 7,600 in the first year, with growth of 5 percent each year for the following four years (Years 2 through 5). Production of these lamps will require $41,000 in networking capital to start. Total fixed costs are $101,000 per year, variable production costs are $25 per unit, and the units are priced at $52 each. The equipment needed to begin production will cost $181,000. 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 38 percent, and the required rate of return is 23 percent. What is the NPV of this project? (

Answer 1

Surf Print	0	1	2	3	4	5
Unit Sales		7,600	7980	8379	8798	9238
Investment	-181,000
NWC	-41,000					41,000
Sales		395,200	414,960	435,708	457,493	480,368
COGS		-190,000	-199,500	-209,475	-219,949	-230,946
FC		-101,000	-101,000	-101,000	-101,000	-101,000
Depreciation		-36,200	-36,200	-36,200	-36,200	-36,200
EBT		68,000	78,260	89,033	100,345	112,222
Tax (38%)		-25,840	-29,739	-33,833	-38,131	-42,644
Net Income		42,160	48,521	55,200	62,214	69,578
Cash Flows	-222,000	78,360	84,721	91,400	98,414	146,778
NPV	$41,955.92

Unit sales grows at 5% each year

Sales = Unit Sales x 52, COGS = Unit Sales x 25

Depreciation = Investment / 5

Cash Flows = Investment + NWC + Net Income + Depreciation

NPV can be calculated using the same function in excel with 23% discount rate.