Question

You have the option to develop and market a new electronic device intended for home use. Getting to this point has cost $300,000. Proceeding to market will cost $750,000. The machinery involved will have a five year productive life. If you proceed, you expect to sell 5, 8, 12, 10, and 6 thousand units in years 1-5. The price in year 1 will be $480. After that, the price will rise 2% each year.

Each year you sell, you must incur administrative expenses of $150,000. Separately, the cost of producing each unit will be $500 in year 1. After that, production costs fall 8% each year.

The tax rate is 35%. Depreciation is linear. Your opportunity cost of capital is constant at 12%. Note: If operating profits are negative, treat them like a depreciated cost for tax purposes.

1. a) What are the per period cashflows associated with the project?

2. b) What is the NPV of the project overall?

Answer 1

YEAR	PRODN COST/UNIT	SALES	TOTAL PRODN COST	SALE PRICE	TOTAL SALES	ADMIN EXP	OPERATING PROFIT	PROFIT AFTER TAX
1	500	5000	2500000	480	2400000	150000	-250000	-250000
2	460	8000	3680000	489.6	3916800	150000	86800	56420
3	423.2	12000	5078400	499.392	5992704	150000	764304	496797.6
4	389.344	10000	3893440	509.37984	5093798	150000	1050358.4	682733
5	358.19648	6000	2149179	519.5674368	3117405	150000	818225.74	531846.7
			NPV	₹ 1,61,047.37