Question

Mont Blanc Livestock Pens, Inc., has projected the amount of sales of $165,000 for the first year of a proposed expansion project and a 10% increase in sales for all subsequent years. Costs normally run 60% of sales. The project should have a 5-year life. The equipment required for the project will cost $30,000 and will be depreciated straight-line to zero over 5 years. The equipment is expected to be worth $0 at the end of 5 years. The company will have to invest $15,000 in net working capital at the start. After that, net working capital requirements will be 30% of sales. The tax rate is 35%, assume that the required return on the project is 28%.

What is the NPV of this project? Show EBIT, OCF, CS, and CNWC for each year of the project's life.

Answer 1

	0	1	2	3	4	5
Investment	-30,000
NWC	-15,000	-39,450	-5,445	-5,990	-6,588	72,473
Sales		165,000	181,500	199,650	219,615	241,577
Costs		-99,000	-108,900	-119,790	-131,769	-144,946
Depreciation		-6,000	-6,000	-6,000	-6,000	-6,000
EBT		60,000	66,600	73,860	81,846	90,631
Tax (35%)		-21,000	-23,310	-25,851	-28,646	-31,721
Profits		39,000	43,290	48,009	53,200	58,910
Cash Flows	-45,000	5,550	43,845	48,020	52,611	137,383
NPV	$68,577.24

Working Capital has to be mentioned at 30% of sales.

NWC = 30% x Sales - Past NWC

Depreciation = Investment / No of years

Cash Flows = Investment + NWC + Profits + Depreciation

NPV can be calculated using the same function in excel or calculator with 28% discount rate.