Problem I need to figure what figures to use to find the NPV.
Caledonia Products
It's been two months since you took a position as an assistant financial analysts at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given you lack of tenure at Caledonia, you have been asked not only to provide a recommendation, but also to respond to a number of questions aimed at judging your understanding of the capital budgeting process. The memorandum you received outlining your assignment follows
:
To: The Assistant Financial analyst
From Mr. V. Morrison, CEO, Caledion products
RE: Cash Flow Analysis and Capital Rationing.
We are considering the introduction of a new product. Currently we are in the 34% tax bracket with a 15% discount rate. This project is expected to last five years and then because this is somewhat of a fad project, it will be terminated. The following information describes the new project:
Cost of new plant and equipment $7,900,000
Shipping and installation costs $100,000
Unit sales
Year Units sold
1 70,000
2 120,000
3 140,000
4 80,000
5 60,000
Sales price per unit: $300/unit in years 1-4
and $260/unit in year 5
Variable Cost per unit $180/unit
Annual fixed costs $200,000 per year
Working capital requirements: There will be an initial working capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be
equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Depreciation method: Straight line over 5 years assuming the plant and equipment have no salvage value after 5 years.
Okay this is my problem. One member of our team has come up with the correct NPV which is NPV = 18,886,361.98
My problem is I can not figure how they got this number, Can anyone help me please
Caledonia Products
It's been two months since you took a position as an assistant financial analysts at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given you lack of tenure at Caledonia, you have been asked not only to provide a recommendation, but also to respond to a number of questions aimed at judging your understanding of the capital budgeting process. The memorandum you received outlining your assignment follows
:
To: The Assistant Financial analyst
From Mr. V. Morrison, CEO, Caledion products
RE: Cash Flow Analysis and Capital Rationing.
We are considering the introduction of a new product. Currently we are in the 34% tax bracket with a 15% discount rate. This project is expected to last five years and then because this is somewhat of a fad project, it will be terminated. The following information describes the new project:
Cost of new plant and equipment $7,900,000
Shipping and installation costs $100,000
Unit sales
Year Units sold
1 70,000
2 120,000
3 140,000
4 80,000
5 60,000
Sales price per unit: $300/unit in years 1-4
and $260/unit in year 5
Variable Cost per unit $180/unit
Annual fixed costs $200,000 per year
Working capital requirements: There will be an initial working capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be
equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Depreciation method: Straight line over 5 years assuming the plant and equipment have no salvage value after 5 years.
Okay this is my problem. One member of our team has come up with the correct NPV which is NPV = 18,886,361.98
My problem is I can not figure how they got this number, Can anyone help me please