Consider the following project for Hand Clapper, Inc. The company is considering
ID: 2719859 • Letter: C
Question
Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.3 million that will be depreciated straight-line to zero over the projects life. An initial investment in net working capital of $1,030,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $13.5 million in pretax revenues with $5.4 million in total pretax operating costs. The tax rate is 38 percent, and the discount rate is 13 percent. The market value of the equipment over the life of the project is as follows: Assuming Hand Clapper operates this project for four years, what is the NPV Compute the project NPV assuming the project is abandoned after only one year. Compute the project NPV assuming the project is abandoned after only two years. Compute the project NPV assuming the project is abandoned after only three years.Explanation / Answer
SOLUTION
a..
Year
revenue
operating cost
depreciation
EBT
TAX
EAT
EAT+DEP
DF@13%
PV
1
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.884955752
5,814,601.77
2
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.783146683
5,145,665.28
3
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.693050162
4,553,686.09
4
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.613318728
4,029,810.70
TOTAL
19,543,763.84
ADD:WORKING CAPITAL (1030000*0.613319)
631,718.29
TOTAL
20,175,482.13
INTIAL COST
16,300,000.00
NPV
3,875,482.13
B-1..
ABONDENED AFTER 1 YEAR
B
Revenue
operating cost
depreciation
EBT
TAX
EAT
EAT+DEP
DF@13%
PV
1
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.884955752
5,814,601.77
ADD:WORKING CAPITAL (1030000*.884956)
911,504.42
SALVAGE (1430000*.884956)
12,654,867.26
TOTAL
19,380,973.45
INTIAL COST
16,300,000.00
NPV
3,080,973.45
B-2..
ABONDENED AFTER 2 YEAR
Year
revenue
operating cost
depreciation
EBT
TAX
EAT
EAT+DEP
DF@13%
PV
1
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.884955752
5,814,601.77
2
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.783146683
5,145,665.28
TOTAL
10,960,267.05
ADD:WORKING CAPITAL (1030000*.783147)
806,641.08
SALVAGE (1130000*.783147)
8,849,557.52
TOTAL
20,616,465.66
INTIAL COST
16,300,000.00
NPV
4,316,465.66
B-3..
ABONDENED AFTER 3 YEAR
Year
revenue
operating cost
depreciation
EBT
TAX
EAT
EAT+DEP
DF@13%
PV
1
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.884955752
5,814,601.77
2
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.783146683
5,145,665.28
3
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.693050162
4,553,686.09
TOTAL
15,513,953.14
ADD:WORKING CAPITAL (1030000*0.69305)
713,841.67
SALVAGE (880000*.69305)
6,098,841.43
TOTAL
22,326,636.24
INTIAL COST
16,300,000.00
NPV
6,026,636.24
Year
revenue
operating cost
depreciation
EBT
TAX
EAT
EAT+DEP
DF@13%
PV
1
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.884955752
5,814,601.77
2
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.783146683
5,145,665.28
3
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.693050162
4,553,686.09
4
13500000
5400000
4075000
4025000
1529500
2495500
6570500
0.613318728
4,029,810.70
TOTAL
19,543,763.84
ADD:WORKING CAPITAL (1030000*0.613319)
631,718.29
TOTAL
20,175,482.13
INTIAL COST
16,300,000.00
NPV
3,875,482.13