The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25. Year Unit Sales 1 24,400 2 42,000 3 4 Thereafter 26,000 5,000 0 It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year 0) investment in working capital of .20 x 24,400 x $40 = $195,200. Plant and equipment necessary to establish the giftware business will require an additional investment of $260,000. This investment will depreciate on the MACRS schedule over 3 years. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 30%. The discount rate is 20%. Use the MACRS depreciation schedule. a. What is the net present value of the project? Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. a. Net present value b. Increase in NPV

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Vijay 

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25.
Year
Unit Sales
1
24,400
2
42,000
3
4
Thereafter
26,000
5,000
0
It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year
0) investment in working capital of .20 x 24,400 x $40 = $195,200. Plant and equipment necessary to establish the giftware business
will require an additional investment of $260,000. This investment will depreciate on the MACRS schedule over 3 years. After 4 years,
the equipment will have an economic and book value of zero. The firm's tax rate is 30%. The discount rate is 20%. Use the MACRS
depreciation schedule.
a. What is the net present value of the project?
Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.
a. Net present value
b. Increase in NPV
Transcribed Image Text:The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25. Year Unit Sales 1 24,400 2 42,000 3 4 Thereafter 26,000 5,000 0 It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year 0) investment in working capital of .20 x 24,400 x $40 = $195,200. Plant and equipment necessary to establish the giftware business will require an additional investment of $260,000. This investment will depreciate on the MACRS schedule over 3 years. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 30%. The discount rate is 20%. Use the MACRS depreciation schedule. a. What is the net present value of the project? Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. a. Net present value b. Increase in NPV
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