The first time I posted this question I got a good answer but not the correct one. It must be one of the three choice below. I'm working another problem so I can review this later. Thanks for your help.

A business opportunity has presented itself to you and one of your classmates. Your opportunity is to enter the fast growing craft beer industry. Your projected sales in the first year is 8300 kegs. Your projected growth rate is 5 percent. Entering the business will require $35,000 of net working capital. Total fixed costs are $95,000. Variable production costs are $36 per keg and keg sales are priced at $57 each. The equipment to begin production is $175,000. The equipment will be depreciated using straight line depreciation over a five year life and has no salvage value. The tax rate is 35 percent and the required return is 25 percent. What is the NPV of the project and should you pursue the project?

A.) -$2,082.17 No, do not take the project.

B.) $17,422.51 Yes, take the project.

C.) -$35,025.85 No, do not take the project.

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Expert Answer

[Anonymous] Anonymous answered this 30 minutes later Was this answer helpful? 0 0 27 answers

Year 0 1 2 3 4 5 sales 8300 8750 9151 9608 10089 Sales @ 57 473100 498750 521607 547646 575056 (-)variable cost @ 36 298800 315000 329436 345888 363204 Fixed cost 95000 95000 95000 95000 95000 Deprciation = 175000/5 35000 35000 35000 35000 Profit 44300 53750 62171 71758 81852 Tax @ 35 % on profit 15505 18812 21760 25115 28648 Net profit after tax 28795 34937 40411 46643 53204 (+) Deprciation =35000 63795 69937 75411 81643 88204

present value @ 25%

Year 1 + Year 2 + Year 3 + Year 4 + Year 5

$51,036.00+ $44,759.68+ $38,610.43+ $33,440.97 +$28,902.69

=

$196,749.77

Intial Cost

Cost of machine = 175000

working capital = 35000

Total outflow = 210000

Net present value = PV of inflows - PV of ou

tflows

$196,749.77- 210000 ($13,250.23)

Since NPV is negative, do not take the project