With the growing popularity of casual surf print clothing, tworecent MBA graduates decided to broaden this casual surf concept toencompass a “surf lifestyle for the home.” With limited capital,they decided to focus on surf print table and floor lamps to accentpeople’s homes.
They projected unit sales of these lamps to be 14,000 for eachof the next five years. Production of these lamps will require$35,000 in net working capital invested immediately. The workingcapital will be fully recovered at the end of year 5. Fixed costsare $95,000 per year, variable production costs are $30 per unit,and the units are priced at $65 each.
a. The equipment needed to begin production will cost $500,000.The equipment will be depreciated using the straight-line methodover a five-year life and is expected to have a salvage value of$80,000. The effective tax rate is 21 percent, and the requiredrate of return is 10 percent. What is the Net Present Value of thisproject?
b. After you complete this task, the two entrepreneurs want youto tell them what the impact on the NPV would be if the Productioncost per unit increased to $45.
