Question: Plato Pharmaceuticals Ltd. has invested $100,000 to date in developing a new type of insect repellent. The repellent is now ready for production and sale, and the marketing manager estimates that the product will sell 150,000 bottles a year over the next five years. The selling price of the insect repellent will be $6 a bottle and variable costs are estimated to be $3 a bottle. Fixed costs (excluding amortization) are expected to be $200,000 a year. The figure is made up of $160,000 additional fixed costs and $40,000 fixed costs relating to the existing business that will be apportioned to the new business.
In order to produce the repellent, machinery and equipment costing $520,000 will have to be purchased immediately. The estimated residual (salvage) value of this machinery and equipment in five years time is $100,000. The business calculates depreciation following CCA rules.
The business has a cost of capital of 12%. CCA 30% (50% rule applicable) of depreciation will be used, and taxes are paid at a rate of 40%.
Required: Calculate the net present value of the product.