Question
The following table presents sales forecasts for Golden Giftware. The unit price is $40. The unit cost of the giftware is $25. Year Unit Sales
The following table presents sales forecasts for Golden Giftware. The unit price is $40. The unit cost of the giftware is $25.
Year | Unit Sales |
---|---|
1 | 22,000 |
2 | 30,000 |
3 | 14,000 |
4 | 5,000 |
Thereafter | 0 |
It is expected that net working capital will amount to 25% of sales in the following year. For example, the store will need an intitial (Year 0) investment in working captial of 0.25 x 22,000 x $40 = $220,000. Plant and equipment necessary to establish the Giftware business will require an additional investment of $200,000. This investment will be depreciated over the 4 year period using the following chart. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 35%. What is the NPV of the project? The discount rate is 20%.
Year | Annual Depreciation ($) |
---|---|
1 | 66,660 |
2 | 88,900 |
3 | 29,620 |
4 | 14,820 |
Total | 200,000 (round up differences) |
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