cpmpany Xis considering launching an inoovative producti.e glass used in TV sets

company X has invested £500,000 to date in developing products
the market research report commissioned by the firm indicates the product will have a 4year life

the equipment required to manufacture the products costs £550,000
it is estimated that at the end of the new product life cycle the equipment will have a zero second hand value

annual sales volumes of 3000 units are forecast for the 4years of the life of the new product

the selling price of the product will be £120 per unit
variable cost £40 per unit
additional overheads of £40000 will be incurred
The cost of capital for the firm is 12% per annnum

assume all receipts and payments occur at year ends ignore inflation and taxation



calculate npv??

selling price n p v
year 1 3,000 360,000.00 321,428.57
year 2 3,000 360,000.00 286,989.80
year 3 3,000 360,000.00 256,240.89
year 4 3,000 360,000.00 228,786.51

1,440,000.00 1,093,445.76

variable cost
3,000 120,000.00 107,142.86
3,000 120,000.00 95,663.27
3,000 120,000.00 85,413.63
3,000 120,000.00 76,262.17

480,000.00 364,481.92

fixed overhead
100,000.00 89,285.71
100,000.00 79,719.39
100,000.00 71,178.02
100,000.00 63,551.81

400,000.00 303,734.93

sales 1,093,445.76
less variable -364,481.92
less fixed -30,373.49

net 698,590.35

net p v of project

development 500,000.00
manufacture 550,000.00
less net sales -698,590.35

total 351,409.65

Rolcam, thoroughly complicated. I know how to do it and this even confused me. Doesn't explain where anything came from. You're doing someone's homework for them. Not to mention that it's incorrect. Where did 100,000 of overhead come from?

And have you ever heard of a present value of an annuity to simplify this process?

amz, I'm not going to just do your problem for you. We have guidelines about posting homework problems here:
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But I'll try to give some hints.

You need to be looking at all the changes the new equipment is going to have. The problem will always list these. In this case, you have sales of 3000 units. And you have overhead.

Do you recall contribution margin? That's the fastest way to it. If you remember that, figure contribution margin and just multiply by the 3000 units to get that total. If you don't remember that, just figure out total sales dollars from the sales price, and then total variable. Remember that sales is a positive cash flow and variable costs are a negative cash flow. You also have fixed costs which are a negative cash flow.

All you need to do is net all of that out -- you don't need to figure present values individually on each number. You have sales +, variable -, and fixed -. That gives you the net positive cash flow you'll have each year. And then do present values on that one number.

And you don't need to do 4 separate present values. Since it's the same amount every year, you can do the present value of an annuity. Getting present values can be done different ways, and they would show you at least one way in the chapter and that may be the method you'll have to use. (Commonly you'll have a present value of an annuity chart.) You only have to do ONE present value of an annuity. The annuity will have the 4 years already built into it.

amz786786,

I apologise , these are amended figures.

SELLING PRICE N P V
YEAR 1 3,000 360,000.00 321,428.57
YEAR 2 3,000 360,000.00 286,989.80
YEAR 3 3,000 360,000.00 256,240.89
YEAR 4 3,000 360,000.00 228,786.51

1,440,000.00 1,093,445.76

VARIABLE COST
3,000 120,000.00 107,142.86
3,000 120,000.00 95,663.27
3,000 120,000.00 85,413.63
3,000 120,000.00 76,262.17

480,000.00 364,481.92

FIXED OVERHEAD
10,000.00 8,928.57
10,000.00 7,971.94
10,000.00 7,117.80
10,000.00 6,355.18

40,000.00 30,373.49

SALES 1,093,445.76
LESS VARIABLE -364,481.92
LESS FIXED -30,373.49

NET 698,590.35

NET P V OF PROJECT

DEVELOPMENT 500,000.00
MANUFACTURE 550,000.00
LESS NET SALES -698,590.35

TOTAL 351,409.65

The fixed overhead should have read
10,000 per year NOT 100,000.

Still far too complicated with lots of unnecessary work. And you're still doing people's homework for them, without any explanation of what it is that you're doing. (And still incorrect, but that's the least of my worries -- the overhead is 40,000.)