With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this

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With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a ´surf lifestyle for the home´. With limited capital, they decided to focus on surf print table and floor lamps to accent people´s homes. They projected unit sales of these lamps to be 5,000 in the first year, with growth of 15 per cent each year for the next five years. Production of these lamps will require £28,000 in net working capital to start. Total fixed costs are £75,000 per year, variable production costs are £20 per unit, and the units are priced £45 each. The equipment needed to begin production will cost £60,000. The equipment will be depreciated using the reducing-balance method (20 per cent, and is not expected to have a salvage value. The effective tax rate is 28 per cent, and the required rate of return is 25 per cent. What is the NPV of this project?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Corporate Finance Core Principles and Applications

ISBN: 978-0077905200

3rd edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford

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