Question
As the finance manager of a company, you are presented with the following project. The company is considering the purchase of a new piece of
As the finance manager of a company, you are presented with the following project. The company is considering the purchase of a new piece of equipment which would cost $210,000. This equipment will have a five-year useful life and have a salvage value of $10,000 at the end of the five-year period. Assume straight-line depreciation It is estimated that
the new equipment will be able to produce 10,000 shelves per year.
the allocated overhead for running the equipment will be $20,000 per year.
they can sell the shelves for $25 each.
the cost of sales is $15 per shelf.
Net Working Capital requirements for the project are as follows:
Year 0 = $10,000
Year 1 = $15,000
Year 2 = $17,000
Year 3 = $15,000
Year 4 = $10,00
The company has a 30% marginal tax rate and a required rate of return of 15%.
Questions:
1. What is the NPV for the project?
2. The company has a preexisting line of shelves that for $25 per unit with a unit cost of $15. You estimate that sales for this preexisting line will increase by 1,000 units per year as long as the new line of shelves is in production. What is the new NPV?
3. The company has a preexisting line of shelves that sell for $25 per unit with a unit cost of $15. You estimate that sales for this preexisting line will decrease by 500 units per year as long as the new line of shelves is in production. What is the new NPV?
4. Several employees will be let go when the project ends. Severance pay for these employees equals $25,000. If the severance pay is included, what is the new NPV? (Hint: Severance pay is a fixed expense like Selling, General, & Administrative expenses)
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