Assume that everything is the same for the project except the marginal tax rate is now 35%. What is the new NPV?

Assume that the cost per unit can be decreased to $12 by using cheaper raw materials to produce the shelves. As news of the lower quality shelves spreads, we also expect that units sold will decrease by 7% per year. All other assumptions remain the same. What is the new NPV?

 

Transcribed Image Text:

unit growth price per unit cost of sales per unit Selling, General & Admin. expense initial investment salvage value useful life Annual Depreciation tax rate discount rate Year Assumptions units Sales Cost of sales Gross Profit Selling, General & Admin. Depreciation EBIT Income Tax Unlevered Net Income Add Back Depreciation Subtract Change in NWC Subtract Capital Expenditure Free Cash Flow Discount Factor FCF Present Value NPV Year Level of NWC Change in NWC Cash Flow Impact of NWC 0% Blue numbers indicate the assumptions 25 15 20,000 incremental overhead 200,000 0 - 5 40,000 Assume straight-line depreciation 30% 15.0% (10,000) (200,000) (210,000) 1 2 10,000 10,000 10,000 250,000 250,000 250,000 150,000 150,000 150,000 100,000 100,000 100,000 100,000 20,000 20,000 20,000 20,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 12,000 12,000 12,000 12,000 28,000 28,000 28,000 28,000 40,000 40,000 40,000 40,000 (5,000) (2,000) 2,000 5,000 0 10,000 10,000 (10,000) 63,000 66,000 (210,000) 54,783 21,232 >0, so accept the project 27 70,000 1 15,000 17,000 5,000 2,000 (5,000) (2,000) 4 10,000 250,000 150,000 0.869565217 0.7561437 0.6575162 0.5717532 0.4971767 49,905 46,026 41,738 38,780 3 15,000 (2,000) 2,000 73,000 5 10,000 250,000 150,000 100,000 20,000 40,000 40,000 12,000 28,000 40,000 10,000 78,000 4 10,000 (5,000) (10,000) 5,000 10,000 5 0 NWC at year 5 - 0 becau 0 (netting acr 0 (netting acr unit growth price per unit cost of sales per unit Selling, General & Admin. expense initial investment salvage value useful life Annual Depreciation tax rate discount rate Year Assumptions units Sales Cost of sales Gross Profit Selling, General & Admin. Depreciation EBIT Income Tax Unlevered Net Income Add Back Depreciation Subtract Change in NWC Subtract Capital Expenditure Free Cash Flow Discount Factor FCF Present Value NPV Year Level of NWC Change in NWC Cash Flow Impact of NWC 0% Blue numbers indicate the assumptions 25 15 20,000 incremental overhead 200,000 0 - 5 40,000 Assume straight-line depreciation 30% 15.0% (10,000) (200,000) (210,000) 1 2 10,000 10,000 10,000 250,000 250,000 250,000 150,000 150,000 150,000 100,000 100,000 100,000 100,000 20,000 20,000 20,000 20,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 12,000 12,000 12,000 12,000 28,000 28,000 28,000 28,000 40,000 40,000 40,000 40,000 (5,000) (2,000) 2,000 5,000 0 10,000 10,000 (10,000) 63,000 66,000 (210,000) 54,783 21,232 >0, so accept the project 27 70,000 1 15,000 17,000 5,000 2,000 (5,000) (2,000) 4 10,000 250,000 150,000 0.869565217 0.7561437 0.6575162 0.5717532 0.4971767 49,905 46,026 41,738 38,780 3 15,000 (2,000) 2,000 73,000 5 10,000 250,000 150,000 100,000 20,000 40,000 40,000 12,000 28,000 40,000 10,000 78,000 4 10,000 (5,000) (10,000) 5,000 10,000 5 0 NWC at year 5 - 0 becau 0 (netting acr 0 (netting acr

Answer rating: 100% (QA)

To calculate the new NPV Net Present Value we will need to adjust for the changes in the marginal tax rate and the changes due to the decreased cost per unit and decreased units sold Ill go through th... View the full answer