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The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent...

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Finance

The Bruin's Den Outdoor Gear is considering a new 6-year projectto produce a new tent line. The equipment necessary would cost$1.35 million and be depreciated using straight-line depreciationto a book value of zero. At the end of the project, the equipmentcan be sold for 10 percent of its initial cost. The companybelieves that it can sell 25,000 tents per year at a price of $67and variable costs of $27 per tent. The fixed costs will be$425,000 per year. The project will require an initial investmentin net working capital of $205,000 that will be recovered at theend of the project. The required rate of return is 12.6 percent andthe tax rate is 35 percent. What is the NPV? $639,997 $362,602$417,859 $522,276 $962,718

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3.8 Ratings (770 Votes)

Annual Operating cashflows:
Sales revenue (25000*67) 1675000
Less: Variable cost (25000*27) 675000
Less: Fixed cost 425000
Less: Annual Deprecciation (1350,000/6) 225000
Net Profit before tax 350000
Less: tax @ 35% 122500
Profit after tax 227500
Add: Depreciation 225000
Annual Operating cashflows: 452500
NPV:
Annual Operating cashflows 452500
Multiply: Annuity PVF at 12.60% 4.04248
Present value of annual cashflows 1829222
Present value of release of NWC 100582.8
(205000*0.490648)
Present value of After tax Salvage of fixed assets 43054
(1350000*10% - 35%)*0.490648
Total Present value of Inflows 1972859
Less: Initial investment
Fixed assets investment 1,350,000
WC investment 205,000 1,555,000
Net Present value 417,859
Answer is $ 417859
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