Problem:
Project Evaluation. The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25.
Year Unit Sales
1 22,000
2 30,000
3 14,000
4 5,000
Thereafter 0
It is expected that net working capital will amount to 20 percent of sales in the following year. For example, the store will need an initial (year-0) investment in working capital of .20 × 22,000 × $40 = $176,000. Plant and equipment necessary to establish the Giftware business will require an additional investment of $200,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 35 percent. What is the net present value of the project? The discount rate is 20 percent.