Reference no: EM132558865
Sound Wired Corporation is considering an investment of $1,000,000 in equipment for producing a new type of compact disc. The equipment has an expected life of five years. Sales are expected to be 150,000 units per year at a price of $25 per unit. Fixed costs excluding depreciation of the equipment are $300,000 per year, and variable costs are $13 per unit. The equipment will be depreciated over five years using the straight-line method with a zero salvage value. Working capital requirements are assumed to be 1/12 of annual sales. The market capitalization rate for the project is 17% per year, and the corporation pays income tax at the rate of 35%.
Answer:
Sales revenue = $25 per unit x 150,000 units per year = $3,750,000 per year
Investment in NWC = 1/12 x $3,750,000 = $312,500
Total investment = $1,000,000 + $312,500 = $1,312,500
Depreciation = $1,000,000 / 5 = $200,000 per year
Total annual operating costs = $13 x 150,000 + $500,000 = $2,450,000 per year
CF = net income + depreciation = (1 - 0.35)(3,750,000 - $2,450,000) + $200,000 = $1,045,000 per year
NPV = PV - Initial Outlay = $3,343,317 - $1,312,500 = $2,030,817
Following the solutions, Id like to know what the these factors are.
- What is the $500,000 added to the total annual operating cost?
- What is the purpose of multiplying the tax rate 35% to the net income?
- How do you get the PV = $3, 343, 317 as indicated in the attached file
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