Sony International has an investment opportunity to produce a new generation color TV. The required investment...

 

Transcribed Image Text:

Sony International has an investment opportunity to produce a new generation color TV. The required investment on January 1 of this year is $32 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the project. The price of the product will be $400 per unit, and will not change. Labor costs for Year 1 will be $15.30 per hour and will increase 2% per year. Energy costs for Year 1 will be $5.15 per physical unit and will increase 3% per year. Revenues are received and costs are paid at year-end. The firm is in the 34 percent tax bracket. Production schedule is: Physical production, in units Year 1 100,000 Year 2 200,000 Year 3 200,000 Year 4 150,000 Labor input, in hours 2,000,000 2,000,000 2,000,000 2,000,000 Energy input, physical units 200,000 200,000 200,000 200,000 The discount rate for Sony is 8 percent. Calculate the NPV of this project. For your reference, use the attached template. A T 23 4 B Initial Investment Depreciations (Years) Unit price C D E FL G H $32,000,000 4 $400.00 5 Unit labor cost $15.30 6 growth rate for labor cost 2% 7 Unit energy cost $5.15 8 growth rate energy costs 3% 9 tax rate 34% 10 discount rate 8% 11 12 Year 0 1 2 3 4 13 Output 0 100,000 200,000 200,000 150,000 14 Labor input 0 2,000,000 2,000,000 2,000,000 2,000,000 15 Energy input 200,000 200,000 200,000 200,000 16 Sales revenue 17 Labor costs 18 Energy costs 19 Depreciation 20 Income before tax 21 Taxes at 34% 22 Net income 23 Cash flow from operations 24 Initial Investment 25 Total cash flow 26 27 PV (@8%) 28 29 NPV 30 Sony International has an investment opportunity to produce a new generation color TV. The required investment on January 1 of this year is $32 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the project. The price of the product will be $400 per unit, and will not change. Labor costs for Year 1 will be $15.30 per hour and will increase 2% per year. Energy costs for Year 1 will be $5.15 per physical unit and will increase 3% per year. Revenues are received and costs are paid at year-end. The firm is in the 34 percent tax bracket. Production schedule is: Physical production, in units Year 1 100,000 Year 2 200,000 Year 3 200,000 Year 4 150,000 Labor input, in hours 2,000,000 2,000,000 2,000,000 2,000,000 Energy input, physical units 200,000 200,000 200,000 200,000 The discount rate for Sony is 8 percent. Calculate the NPV of this project. For your reference, use the attached template. A T 23 4 B Initial Investment Depreciations (Years) Unit price C D E FL G H $32,000,000 4 $400.00 5 Unit labor cost $15.30 6 growth rate for labor cost 2% 7 Unit energy cost $5.15 8 growth rate energy costs 3% 9 tax rate 34% 10 discount rate 8% 11 12 Year 0 1 2 3 4 13 Output 0 100,000 200,000 200,000 150,000 14 Labor input 0 2,000,000 2,000,000 2,000,000 2,000,000 15 Energy input 200,000 200,000 200,000 200,000 16 Sales revenue 17 Labor costs 18 Energy costs 19 Depreciation 20 Income before tax 21 Taxes at 34% 22 Net income 23 Cash flow from operations 24 Initial Investment 25 Total cash flow 26 27 PV (@8%) 28 29 NPV 30

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the project we need to consider the cash flows over ... View the full answer