Question
Howard Inc. is planning to build a plant to supply special purpose batteries for electric car manufacturers. It will require the company to invest $25
Howard Inc. is planning to build a plant to supply special purpose batteries for electric car manufacturers. It will require the company to invest $25 million in plant and equipment to manufacture the batteries. The plant is expected to operate for five years after which it will be closed down. The plant and equipment purchased is expected to be sold for $5.0 million at the end of the five-year period. The equipment is expected to be depreciated on the basis of a 5-year MACRS schedule (20%, 32%, 19%, 12%, 11%, and 6.0% respectively). Net working capital required is expected to be 1% of next year sales. The companys tax rate is 21%. The company plans to sell 1.5 million units of batteries in the first year. Beyond that, unit sales are expected to increase by 3%. The variable cost per unit for each battery is expected to be $450. The annual fixed costs are expected to be $75 million. The selling price per unit is expected to be $485. The firms cost of capital is 12%. What is the NPV of the contract? What is the minimum price per unit the company should charge for the project to be profitable?
Assumptions | ||||||||
Depreciation Schedule | ||||||||
Unit Sales First Year -millions | 1.50 | 1 | 2 | 3 | 4 | 5 | 6 | |
Growth in Unit Sales | 3% | Beg BV | ||||||
Working Capital Yrs 1-5 as %Next Year Sales | 1% | Dep Rate | 20% | 32% | 19% | 12% | 11% | 6% |
Equipment Cost | $ 20.00 | Dep Amt | ||||||
Fixed Costs per Year in millions | $ 75.00 | Ending BV | ||||||
Equipment Selling Price in Year 5 | $ 5.00 | |||||||
Variable cost per unit | $ 450.00 | |||||||
Selling Price per Unit (Yrs 1-5) | $ 485.00 | |||||||
Tax Rate | 21% | |||||||
Cost of Capital | 12% | |||||||
Minimum Bid Price | ||||||||
Years | 1 | 2 | 3 | 4 | 5 | |||
Unit Volume | ||||||||
Sales | ||||||||
Variable Costs | ||||||||
Fixed Costs | ||||||||
Depreciation | ||||||||
EBIT | ||||||||
EBIT*(1-T) | ||||||||
Operating Cash Flow |
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