# Construct the annual cash flows and calculate the NPV and PI

11.21

*Expenses -% of Sales

Year Units Sold Selling price COGS Marketing Admin Expenses

1 125 $80.00 70.00% 24.00% $180.00

2 250 82 68.00% 22.00% 150

3 300 85 68.00% 20.00% 150

4 250 80 66.00% 15.00% 150

*all expenses exclude depreciation

Working Captial: $600 initially Year (0); $200 (year 1): full recovery

Initial investment: $4,800

Salavge value: $500 at the end of year 4

Tax rate: 39%

Cost of capital: 10%

Assume: (1) Straight-line depreciation to zero and (2) any taxable losses can be immediately used to

offset taxable income somewhere else in the company.

A) Contrauct the annual cash flows and calculate the NPV and PI for a project with the given

information above.

B) You hire a VP, who believe that by using a higher percentae of media advertising she can increase

the number of units sold each year by 100. Recalculate the cash flows and NPV assuming this new campaign

requires an additioanl $50 increase in administration expense and 2% (200 basis point) increase

in marketing (or 26, 24, 22, and 17% in years 1 through 4, respectively) to cover the additional

advertising in each of the four years to support the higher sales level. Is this a better alternative?

C) You believe the tactic of the VP is riskier and should be discounted at a higher discount rate

of 15%. Recalculate the revised projects NPV. Should you make the added investment?

https://brainmass.com/business/capital-budgeting/construct-annual-cash-flows-calculate-the-npv-pi-393881

#### Solution Summary

The expert constructs the annual cash flows and calculates the NPV and PI.