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% of sales in the following year. For example, the store will need an initial (Year 0) investment in working capital of 0.20 × 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 30%. The discount rate is 20%. Use the MACRS depreciation schedule. a. What is the net present value of the project? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
The following table presents sales
| 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% of sales in the following year. For example, the store will need an initial (Year 0) investment in working capital of 0.20 × 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 30%. The discount rate is 20%. Use the MACRS depreciation schedule.
a. What is the
Net present value - It is the sum of the present value of all future cash inflows minus the sum of the present value of all cash outflows associated with the project.
NPV= Present value of cash inflows - Present value of cash outflow
Working Note #1
Cost of Plant & Machinery = $200,000
| Computation of Depreciation using MACRS (3 year life) | ||
| Year | Rate | Depreciation Amount ($) |
| 1 | 33.33% | 66660 |
| 2 | 44.45% | 88900 |
| 3 | 14.81% | 29620 |
| 4 | 7.41% | 14820 |
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