Earmuffs, Inc. is considering a new six-year venture with the following characteristics:
Initial advertising and marketing expenses = $1,160,000
Initial cost (price tag) of new equipment (assume 5-year SL) = $400,000
Investment in training completed last year = $200,000
Incremental sales volume expected (in units, years 1-3) = 100,000
Incremental sales volume expected (in units, years 4-6) = 120,000
Selling price per unit = $30
Cost to manufacture (per unit) = $16
Other incremental cash expenses (years 1-6) = $400,000
Project salvage value end of year 6 = $50,000
Corporate tax rate = 34%
Corporate cost of capital = 14%
What is the Initial Investment for this venture?
What is the Depreciable Base for the project?
What is the 3rd year’s operatinv cash flow [OCF(3)]?
What is the 4th year’s operatinv cash flow [OCF(4)]?
What is the project’s net Terminal Value?
What is the project’s NPV?
What is the project’s IRR?
What is the project’s MIRR?
| Amount In $ | ||
| Initial cost (price tag) of new equipment (assume 5-year SL) | 400000 | |
| Add : | ||
| Investment in training completed last year | 200000 | |
| Initial advertising and marketing expenses | 1160000 | |
| Total Initial Investment | 1760000 | |
| Depriciation = 20000-50,000/5 year | 150000 | 30000 |
Depriciation = 30,000
| Incremental sales volume expected (in units, years 1-3) |
100000 |
| Incremental sales volume expected (in units, years 4-6) |
120000 |
| Year | ||||||
| 1 | 2 | 3 | 4 | 5 | 6 | |
| Particular | ||||||
| Selling price per unit S | 30 | 30 | 30 | 30 | 30 | 30 |
| Cost to manufacture (per unit) V | 16 | 16 | 16 | 16 | 16 | 16 |
| Contribution = S-V | 14 | 14 | 14 | 14 | 14 | 14 |
| Incremental Unis | 100000 | 100000 | 100000 | 120000 | 120000 | 120000 |
| Incremental Contribution | 1400000 | 1400000 | 1400000 | 1680000 | 1680000 | 1680000 |
| Other incremental cash expenses (years 1-6) | 400000 | 400000 | 400000 | 400000 | 400000 | 400000 |
| Cash flow before tax | 1000000 | 1000000 | 1000000 | 1280000 | 1280000 | 1280000 |
| Tax @ 34% | 340000 | 340000 | 340000 | 435200 | 435200 | 435200 |
| Cash flow After tax | 660000 | 660000 | 660000 | 844800 | 844800 | 844800 |
| Add: | ||||||
| Depriciation Tax Shelter= 30000*34% | 10200 | 10200 | 10200 | 10200 | 10200 | 10200 |
| Salvage Value | 50,000 | |||||
| Net Cash Flow | 670200 | 670200 | 670200 | 855000 | 855000 | 905,000 |
| PV Factor @ 14% | 0.87719 | 0.76947 | 0.67497 | 0.59208 | 0.51937 | 0.4556 |
| NPV | 587895 | 515697 | 452366 | 506229 | 444060 | 412305.8257 |
| Total NPV | 2918552 |
| Initial Investment | 1760000 |
| NPV | 1158552 |
IRR of the project is
IRR = 1760000 + 670200 (1+R) + 670200 (1+R)2 + 670200 (1+R)3+ 855000 (1+R)4+85500(1+R)5+ 905000(1+R)6
Using Trial and error method we have find IRR
= 34.30%
