Suppose a firm is considering the following project, where all the dollar figures are in thousands of dollars.
In year 0, the project requires $37,500 investment in plant and equipment, is depreciated using straight line method over 7 years and the salvage value at year 7 is $5,600.
The project is forecast to generate base case unit sales of 2000 in year 1. The sales growth rate is 55% in year 2 and the change in sales growth rate declines by 15% in years 3 and 4, declines by 20% in year 5, 25% in 6, and 30% in 7.
Unit sales will drop to year 0 in 8.But the unit sales scale factor is estimated to be 120%.
Inflation rate is 2% in year 1 and increases by 0.6% up to year 5 and then levels off. The real cost of capital in year 1 is 10.5% and the real cost of capital increment is 0.2%. The real growth rate is 6% in year 2, 7% in year 3, 9% in year 4, 8% in year 5, 7% in year 6 and 6% in year 7.
Tax rate is 35% for all the years. Sales revenue per unit is forecast to be $9.7 in year 1. Direct labor, materials, selling expenses and other variable cost are forecast to be $3.5, $2, $1.2 and $0.7 respectively.
Lease payment, Property taxes, Administration, Advertising and other cash fixed costs are forecasted to be $2800, $540, $480, $930 and $520 respectively.
The project will require working capital in the amount of $0.87 in year 0 for every unit of next years forecasted sales and this amount will grow with inflation. Without the cost reducing investment, the depreciation is $1300. With cost reducing investment, the total variable cost is $6.4 per unit.
What is the cost reducing NPV?
(Please post an excel sheet if possible)