Question

You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 4 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 12 percent and the company has a 23 percent tax rate.

		Pessimistic				Expected				Optimistic
	Market size		123,000				133,000				145,000
	Market share		20	%			24	%			26	%
	Selling price	$	147			$	152			$	156
	Variable costs per unit	$	100			$	96			$	93
	Fixed costs per year	$	972,000			$	917,000			$	887,000
	Initial investment	$	1,342,000			$	1,192,000			$	1,172,000

Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

E34 A B x C Contributio n per unit fix =-L33/4 D E Depreciati Fixed costs on F G H Sale I J Depreciati Operating on cash flows PBT Tax@23% PAT 32 Year units 33 0 34 1 24,600 35 21 24,600 36 3 24,600 37 4 24,600 38 L L M N O Total cash Investment flows PVIF@12% Present value (1,342,000) (1,342,000) 1.000 $ (1,342,000.00) 218,999 0.893 $ 195,534.82 218,999 0.797 $ 174,584.66 218,999 0.712 $ 155,879.16 218,999 0.636 $ 139,177.82 $ $ $ $ 47$ 972,000 47 $ 972,000 47 $ 972,000 47 $ 972,000 $ 335,500 $ (151,300) $ (34,799) $(116,501) $ 335,500 $ 218,999 $ 335,500 $ (151,300) $ (34,799)| $(116,501) $ 335,500 $ 218,999 $ 335,500 $ (151,300) $ (34,799) $(116,501) $ 335,500 $ 218,999 $335,500 $ (151,300) $ (34,799) $(116,501) $ 335,500 $ 218,999 Pessimistic NPV $676,823.53 40 Sale Contributio Depreciati Depreciati Operating Total cash 41 Year units n per unit Fixed costs on |PBT Tax@23% PAT on cash flows Investment flows PVIF@12% Present value 42 ol (1,192,000) (1,192,000) 1.000 $ (1,192,000.00) 43 1 31,920 $ 56 $ 917,000 $ 298,000 $ 572,520 $131,680 $ 440,840 $ 298,000 $ 738,840 738,840 0.893 $ 659,678.93 2 31,920 $ 56 $ 917,000 $ 298,000 $ 572,520 $131,680 $ 440,840 $ 298,000 $ 738,840 738,840 0.797 $ 588,999.04 45 3 31,920 $ 56 $ 917,000 $ 298,000 $ 572,520 $131,680 $ 440,840 $ 298,000 $ 738,840 738,840 0.712 $ 525,892.00 46 4 31,920 $ 56 $ 917,000 $ 298,000 $ 572,520 $131,680 $ 440,840 $ 298,000 $ 738,840 738,840 0.636 $ 469,546.43 47 48 Expected NPV $ 1,052,116.41 49 Sale Contributio Depreciati Depreciati Operating Total cash 50 Year units n per unit Fixed costs on PBT Tax@23% PAT on cash flows Investment flows PVIF@12% Present value 51 0 (1,172,000) (1,172,000) 1.000 $ (1,172,000.00) 52 1 37,700 $ 63 $ 887,000 $ 293,000 $1,195,100 $274,873 $ 920,227 $ 293,000 $1,213,227 1,213,227 0.893 $ 1,083,238.39 53 2 37,700 $ 63 $ 887,000 $ 293,000 $1,195,100 $274,873 $ 920,227 $ 293,000 $1,213,227 1,213,227 0.797 $ 967,177.14 54 3 37,700 $ 63 $ 887,000 $ 293,000 $ 1,195,100 $274,873 $ 920,227 $ 293,000 $1,213,227 1,213,227 0.712 $ 863,551.01 55 4 37,700 $ 63 $ 887,000 $ 293,000 $ 1,195,100 $274,873 $ 920,227 $ 293,000 $1,213,227 1,213,227 0.636 $ 771,027.69 su bat Depreciati operating 56 Optimistic NPV $2,512,994.24

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