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