Suppose you are evaluating a project for The Ultimate recreational tennis rackets, guaranteed to correct...
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Suppose you are evaluating a project for The Ultimate recreational tennis rackets, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 and sales to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. In addition, you figure the project has a life of 3 years. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 which is depreciated straight-line to zero over the three-year life of the project. The actual market value of the initial investment after year 3 is $35,000. Initial net working capital (NWC) investment is $75,000 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project (that is, cost of capital) is determined to be 10%. Calculate NPV of project.
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