Chapter 6, Problem 23QP

Calculating Project NPV 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 9,500 in the first year, with growth of 8 percent each year for the next five years. Production of these lamps will require $45,000 in net working capital to start. Total fixed costs are $115,000 per year, variable production costs are $21 per unit, and the units are priced at $53 each. The equipment needed to begin production will cost $190,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 34 percent, and the required rate of return is 18 percent. What is the NPV of this project?