Question - The following table presents sales forecasts for Golden Gelt Giftware.
Year Unit sales 1 25,000 2 30,000 3 15,000 4 5,000
The unit price is $40. The variable cost per unit of the giftware is $25. The fixed cost is $200,000 per year.
It is expected that net working capital level (or requirement) each year will amount to 15% of total revenue in the following year, i.e., year 0's working capital level is 15% of revenue in year 1, year 1's working capital level is 15% of reveue in year 2, etc..
Plant and equipment necessary to establish the Giftware business will require an investment of $180,000. The shipping and installation cost is $20,000. The equipment and plant (including the shipping and installation cost) will be depreciated using 3-year MACRS with rates: 33.33%, 44.45%, 14.81%, and 7.41% to the book value of zero.
After 4 years, the equipment can be sold for $50,000.
Golden Gelt Giftware allocates overhead expenses each year at $150,000. These overhead expenses cover headquarters expenses such as the top executive salaries. No increase in firm level overhead expense is expected from the project.
Financing cost for the project will be $250,000 per year.
Assume that the firm has positive pre-tax income on the firm level from its other existing operations (i.e., the firm pays positive tax amount on the firm level. Any negative EBIT from the project should be receiving negative tax amount (i.e., tax credit)).
The firm's tax rate is 35%. The discount rate is 15%.
1. Calculate IRR and traditional payback period in addition to NPV.
2. Generate an NPV profile (graph optional).
3. What is your conclusion on whether you should accept or reject the project?