The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25. Year 1 2 3 4 Thereafter Unit Sales 22,000 30,000 14,000 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 O) investment in working capital of 0.20 x 22,000 x $40 = $176,000. Plant and equipment necessary to establish the giftware business will require an additional investment of $200,000. This investment will be depreciated straight-line 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. b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation? a. Net present value

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
Section: Chapter Questions
Problem 1PS
icon
Related questions
icon
Concept explainers
Question
The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the
giftware is $25.
Year
1
2
3
4
Thereafter
Unit Sales
22,000
30,000
14,000
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 O) investment in working capital of 0.20 x 22,000 $40 = $176,000. Plant and equipment
necessary to establish the giftware business will require an additional investment of $200,000. This investment will
be depreciated straight-line 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.
b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation?
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 1 2 3 4 Thereafter Unit Sales 22,000 30,000 14,000 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 O) investment in working capital of 0.20 x 22,000 $40 = $176,000. Plant and equipment necessary to establish the giftware business will require an additional investment of $200,000. This investment will be depreciated straight-line 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. b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation? a. Net present value. b. Increase in NPV
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 6 images

Blurred answer
Knowledge Booster
Cost of Capital
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education