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 five years. The equipment required for the project has no salvage value and will be depreciated on a straight-line basis. The required return for projects of this type is 14 percent, and the company has a 35 percent tax rate. Expected 122,000 22% Market size Market share Selling price Variable costs per unit Fixed costs per year Initial investment Pessimistic 107,000 19% $ 152 $ 106 $ 967,000 $1,595,000 $ 157 $ 101 $ 922,000 $1,510,000 Optimistic 147,000 24% $ 163 $ 100 $ 892,000 $1,425,000 Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) A Pessimistic Expected Optimistic A A

Answer 1

solution: 122 market size x market share No of racket sold Pessimistic Expected Optimistic 107,000 122,000 147,000 19% 22% 24% 20330 26840 35280 Depreciation 319,000.00 1595000/5 302,000.00 1510000/5 285,000.00 1425000/5 calculation of NPV Pessimistic Expected Optimistic Selling price 152 157 163 Less : variable cost per unit -106 -101 -100 contribution margin 46 5663 x No of racket sold 20330 26840 35280 Total contribution margin 935,180.00 1,503,040.00 2,222,640.00 Less : fixed cost 967,000.00 - 922,000.00 - 892,000.00 Less : Depreciation 319,000.00 - 302,000.00 - 285,000.00 income before tax 350,820.00 279,040.00 1,045,640.00 Less : tax at 35% 122,787.00 - 97,664.00 - 365,974.00 net income 228,033.00 181,376.00 679,666.00 Add : Depreciation 319,000.00 302,000.00 285,000.00 OCF 90,967.00 483,376.00 964,666.00 x PVIFA(14%,5)** 3.43308 3.43308 3.43308 PV of OCE 312,297.08 1,659,468.95 3,311,776.49 Less : Initial investment - 1,595,000.00 - 1,510,000.00 - 1,425,000.00 NPV 1- 1,282,702.92 149,468.95 1,886,776.49 **Factor working; PVIFA(14%,5) formula 3.43308 (1-(1.141-5)/0.14 (1-(1+r)^-n)/r