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Homework answers / question archive / You are considering a new product launch
You are considering a new product launch. The project will cost $820,000, have a four-year life, and have no salvage value: depreciation is straight-line to zero. The feasibility study cost was $10,000. Sales are projected at 450 units per year, price per unit will be $18,000; variable cost per unit will be $15,400; and fixed costs will be $610,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 35 percent.
Using Excel Sheet, What will be the new base case NPV if equipment will be sold at the end of project for $500,000 and that there will be an initial investment in net working capital of $50,000 which will be recovered at the end of the project?
| Time line | 0 | 1 | 2 | 3 | 4 | |||
| Cost of new machine | -820000 | |||||||
| Initial working capital | -50000 | |||||||
| =Initial Investment outlay | -870000 | |||||||
| 100.00% | ||||||||
| Unit sales | 450 | 450 | 450 | 450 | ||||
| Profits | =no. of units sold * (sales price - variable cost) | 1170000 | 1170000 | 1170000 | 1170000 | |||
| Fixed cost | -610000 | -610000 | -610000 | -610000 | ||||
| -Depreciation | Cost of equipment/no. of years | -205000 | -205000 | -205000 | -205000 | 0 | =Salvage Value | |
| =Pretax cash flows | 355000 | 355000 | 355000 | 355000 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | 230750 | 230750 | 230750 | 230750 | |||
| +Depreciation | 205000 | 205000 | 205000 | 205000 | ||||
| =after tax operating cash flow | 435750 | 435750 | 435750 | 435750 | ||||
| reversal of working capital | 50000 | |||||||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 325000 | ||||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||||
| =Terminal year after tax cash flows | 375000 | |||||||
| Total Cash flow for the period | -870000 | 435750 | 435750 | 435750 | 810750 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.15 | 1.3225 | 1.520875 | 1.7490063 | ||
| Discounted CF= | Cashflow/discount factor | -870000 | 378913.0435 | 329489.603 | 286512.6983 | 463548.94 | ||
| NPV= | Sum of discounted CF= | 588464.29 |
