It's January 1, 2011. Company XYZ wants to build a teddy bear factory. They have already spent $10 million dollars in the past year building the factory, and expect to spend $10 million dollars per year for the next 4 years, to be paid on December 31st each year (assume the first of these 4 payments occurs on December 31, 2011). On January 1, 2015, they will start selling the teddy bears and make exactly $70 million dollars in profit, received on December 31, 2015. On January 1, 2016 the company shuts down forever (no additional cash flows). The discount rate for this project is 10%.

Question

It's January 1, 2011. Company XYZ wants to build a teddy bear factory. They have already spent $10 million dollars in the past year building the factory, and expect to spend $10 million dollars per year for the next 4 years, to be paid on December 31st each year (assume the first of these 4 payments occurs on December 31, 2011). On January 1, 2015, they will start selling the teddy bears and make exactly $70 million dollars in profit, received on December 31, 2015. On January 1, 2016 the company shuts down forever (no additional cash flows). The discount rate for this project is 10%.

What is the current NPV of this project (MM is in millions)? *

Answer 1

Production budget

Jan-Mar April-June July-Sept Oct-Dec 2011
Qty to be sold 1080000 1360000 980000 1100000 4520000
add Ending Inventory 136000 98000 110000 120000 120000
less openng inventory -94500 -136000 -98000 -110000 -94500
Qty to be produced 1121500 1322000 992000 1110000 4545500

Answer 2

To calculate the Net Present Value (NPV) of this project, we need to discount the future cash flows to their present value.

First, let's break down the cash flows:

Year 1 (2011):
- There is no cash flow in Year 1.

Year 2 (2012) to Year 4 (2014):
- The company expects to spend $10 million per year. Since these cash flows occur at the end of each year, we need to discount them to their present value. To do this, we use the discounted cash flow (DCF) formula:
Present Value = Future Value / (1 + Discount Rate)^n
Where n is the number of years from now when the cash flow occurs.

For Year 2 (2012), n = 2, Year 3 (2013), n = 3, and Year 4 (2014), n = 4.
So, the present value of these cash flows can be calculated as follows:
Year 2 PV = $10 million / (1 + 0.10)^2
Year 3 PV = $10 million / (1 + 0.10)^3
Year 4 PV = $10 million / (1 + 0.10)^4

Year 5 (2015):
- The company expects to make a profit of $70 million, received on December 31, 2015. Since this cash flow occurs at the end of the year, we need to discount it to its present value. Using the DCF formula, the present value of this cash flow is:
Year 5 PV = $70 million / (1 + 0.10)^4

Year 6 (2016):
- There are no cash flows in Year 6.

Now, let's calculate the NPV by summing up the present values of these cash flows:

NPV = (Year 2 PV) + (Year 3 PV) + (Year 4 PV) + (Year 5 PV) - (Initial Investment)

Since the initial investment is given as $10 million, we can substitute the present values and calculate the NPV.

I will perform the calculations for you:

Year 2 PV = $10 million / (1 + 0.10)^2 = $10 million / 1.21 ≈ $8.26 million
Year 3 PV = $10 million / (1 + 0.10)^3 = $10 million / 1.331 ≈ $7.51 million
Year 4 PV = $10 million / (1 + 0.10)^4 = $10 million / 1.4641 ≈ $6.83 million
Year 5 PV = $70 million / (1 + 0.10)^4 = $70 million / 1.4641 ≈ $47.80 million

NPV = $8.26 million + $7.51 million + $6.83 million + $47.80 million - $10 million
= $70.40 million

Therefore, the current NPV of this project is approximately $70.40 million.