You have been hired as a consultant by a local firm to analyze a new three year project. The company must ramp up production on a three year project. The firms will be able to sell 35,000, 45,000 and 30,000 units each of the next three years respectively and then cease production. The company will be able to sell the units at $35 each. The fixed costs for the project will be $270,000 per year. The equipment necessary for production will cost $1,200,000 and be depreciated to zero on a straight line basis. At the end of the project the equipment may be sold for $145,000 before tax. Net working capital of $150,000 will be required to begin the project and variable costs are 30 percent of sales. The tax rate is 21% and the discount rate is 12%. Calculate the NPV and the IRR for this project. What is your recommendation, should the company invest in the project or not? 35,000 45,000 30,000 35 A A A 270,000 1,200,000 33.33% 33.33% 33.33% Units sold per year Price per pair Fixed costs Equipment Depreciation Salvage value NWC VC per unit Property value in 5 years after tax Tax rate Required return $ $ 145,000 150,000 30% 750,000 21% 12% $ Year 0 Year 1 Year 2 Year 3 Sales Variable Costs Fixed Costs Depreciation Earnings Before Taxes (EBT) Tax Net income OCF Capital Equipment Spending NWC Total cash flow Salvage Sell old Taxes Aftertax salvage value NPV IRR Invest: Yes or No You have been hired as a consultant by a local firm to analyze a new three year project. The company must ramp up production on a three year project. The firms will be able to sell 35,000, 45,000 and 30,000 units each of the next three years respectively and then cease production. The company will be able to sell the units at $35 each. The fixed costs for the project will be $270,000 per year. The equipment necessary for production will cost $1,200,000 and be depreciated to zero on a straight line basis. At the end of the project the equipment may be sold for $145,000 before tax. Net working capital of $150,000 will be required to begin the project and variable costs are 30 percent of sales. The tax rate is 21% and the discount rate is 12%. Calculate the NPV and the IRR for this project. What is your recommendation, should the company invest in the project or not? 35,000 45,000 30,000 35 A A A 270,000 1,200,000 33.33% 33.33% 33.33% Units sold per year Price per pair Fixed costs Equipment Depreciation Salvage value NWC VC per unit Property value in 5 years after tax Tax rate Required return $ $ 145,000 150,000 30% 750,000 21% 12% $ Year 0 Year 1 Year 2 Year 3 Sales Variable Costs Fixed Costs Depreciation Earnings Before Taxes (EBT) Tax Net income OCF Capital Equipment Spending NWC Total cash flow Salvage Sell old Taxes Aftertax salvage value NPV IRR Invest: Yes or No
