You consider launching a new project of face (medical) masks manufacturing. 5 years project.

The expected mask sales price is $1. The year 1 volume forecast is 10 M units. Year-over-year sales growth is 10% (volume is stable, only price increase). 

The cost per unit is $0.6. COGS increase year-over-year 10%.

To launch manufacturing, you need 10 sewing machines. 1 machine price is $200,000, the useful life is 5 years. Buy it on year 0. Depreciation starts from year 1.

Annual operating expenses including rent of workshop, office, salary etc. is $2.7M without depreciation. Depreciation I on top of that (not included to $2.7M). 

Opex (without depreciation) annual growth = average inflation rate 10%.

Inventory needs to be maintained every time at a level of 3 M units. This volume should be produced in year 1 and kept stable all 10 years (the same $ value year over year - do not increase every year on inflation rate).

No credit terms to your customers, no credit terms from your suppliers. All debts are to be paid right in time of delivery/purchase.

The tax rate is 30%. The opportunity cost of capital relevant to this industry is 20%.

Required:

Estimate the NPV of the project (carrying inventory) assuming at five-years life for the investment?

Answer rating: 100% (QA)

SOLUTION To estimate the NPV of the project we need to calculate the annual cash flows for each year ... View the full answer