accounting NPV problem?

can somebody please help me solve and understand this???

Bentley Inc. can invest $900,000 in a new plant for producing packs of pencils. The plant has an expected life of 5 years, and expected sales are 700,000 packs of pencils a year. Fixed costs are $750,000 a year, and variable costs are $0.60 per pack of pencils. Each pack of pencils will be priced at $2.90. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 9 percent, and the tax rate is 30 percent.

what is NPV and how do i find it?

how much should a pack of pensils to be sold for to have a project NPV of zero?

in this case, what is NPV and how do i find it if the variable cost turned out to be 1.15 per pack??

what would NPV be if fixed costs turned out to be 500 000 (using 0.6 as variable costs)??

2 Answers

  • 1 decade ago
    Best Answer

    wow, you're asking for quite a bit, and it's much much easier to do in excel...

    NPV: Net present value is adding up all of the incremental cash flows and discounting them back (given that a dollar today is worth more than a dollar 5 years from now b/c you can put it in the bank and invest it and have more than 1 dollar). keep in mind that depreciation is a tax shield in future yrs so you actually pay less in taxes when it is depreciated (but you can't count it as an expense up front)

    to calculate NPV you determine all of the cash flows during the different years:

    now: -900,000

    yr1: 656,000 / (1.09) = 601,835

    yr2: 656,000 / (1.09^2) = 552,142

    yr3: 656,000 / (1.09^3) = 506,552

    yr4: 656,000 / (1.09^4) = 464,727

    yr5: 656,000 / (1.09^5) = 426,355

    adding all of those together, the NPV is 1,651,611. basically, you should accept any project where the NPV is positive. i'll let you practice with the other things to see how things change (it's much easier in excel. you can use solver to set the NPV = zero, etc). good luck!

    the work:

    yearly incremental income: 860,000 revenue * (1-.3) + 54,000 tax shield = 656,000

    revenue: 700,000pencils * (2.9 SellingPrice - .6 VarCost) - 750,000 FixedCost = 860,000 per year

    tax shield: = 900,000cost / 5yrs * 30% = 180,000 * 30% = 54,000

  • 1 decade ago


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