I am struggling with this capital budgeting exercise; the solution given by the teacher should be NPV = 41.4
I calculated the cash flows:
- Company Alfa has invested 300 CU in developing a new product
- Sales are expected to be 750 CU per year for the following 5 years
- Variable costs: 450 CU per year
- Fixed costs: 200 CU per year. Note that the fixed costs consist of 160 CU as additional fixed costs and 40 CU relating to the existing business which will be apportioned to the new product.
- Purchase of a new machine to produce the new product: 520 CU (purchased and paid immediately)
- Machine's salvage value: 100 CU. Depreciation is on a straight line basis
- Cost of capital: 12%
- Calculate the NPV for the product.
Year 0: -820
From year 1 to 4: 140
Year 5: 240
For the fixed costs I only took in consideration 160CU per year since it's the only portion related to the new product.
Then I calculated the NPV as follows: -820+140/(1.12)+140/(1.12)^2+140/(1.12)^3+140/(1.12)^4+240/(1.12)^5= -228.96
I would be grateful if someone can help understanding where I'm doing it wrong. Thank you in advance.
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Capital budgeting exercise: what am I getting wrong? watch
- Thread Starter
- 30-12-2012 20:14