Q1.

year 1Year 2Year 3Year 4-6
Sales in units9000150001800022000
Sales in dollars315000525000630000770000
Variable expenses135000225000270000330000
Contribution margin180000300000360000440000
Fixed expenses:
Salaries and other135000135000135000135000
Advertising180000180000150000120000
Total Fixed Expenses315000315000285000255000
Net Cash inflow (Outflow)-135000-1500075000185000

 

Q2.

Now123456
Cost of equipment-315000
Working capital-60000
Yearly net cash flows-375000-135000-1500075000185000185000185000
Release of working capital60000
Salvage value of equipment15000
Total cash flows-375000-135000-1500075000185000185000260000
Discount factor (14%)               1.0000    0.8772    0.7695    0.6750    0.5921    0.5194    0.4556
Present value            (375,000) (118,421)   (11,542)     50,623  109,535     96,083  118,453
Net present value            (130,270)

 

On the basis of the net present value, it is not recommended that the company undertake this project. This is because its net present value is negative.

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