Chapter 26, Problem 7MC

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a "surf lifestyle for the home." With limited capital, they decided to focus on surf print table and floor lamps to accent people's homes. They projected unit sales of these lamps to be 7,600 in the first year, with growth of 5 percent each year for the next five years. Production of these lamps will require $41,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $101,000 per year, variable production costs are $25 per unit, and the units are priced at $52 each. The equipment needed to begin production will cost $181,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 21 percent and the required rate of return is 23 percent. What is the NPV of this project? Note:…

Forest Enterprises, Incorporated, has been considering the purchase of a new manufacturing facility for $290,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $125,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 2 percent. Production costs at the end of the first year will be $50,000, in nominal terms, and they are expected to increase at 3 percent per year. The real discount rate is 5 percent. The corporate tax rate is 25 percent. Calculate the NPV of the project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV

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