Question

Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $992,000, and its economic life is five years. The machine will be fully depreciated by the straight-line method. The machine will produce 37,000 keyboards each year. The price of each keyboard will be $35 in the first year and will increase by 5 percent per year. The production cost per keyboard will be $15 in the first year and will increase by 6 percent per year. The project will have an annual fixed cost of $212,000 and require an immediate investment of $42,000 in net working capital. The corporate tax rate for the company is 38 percent. The appropriate discount rate is 10 percent. What is the NPV of the investment?

Answer 1

Year	Cash outflows	Cash inflows	Depreciation = D = 992000/5	Net Working capital = NWC	Net Cash flows = Cash outflow + NWC	Discount factor = Df = 1/(1+Rate)^Year	Present Values
0	-992000.00	0.00	0.00	-42,000.00	-1,034,000.00	1.000000	-1,034,000.00
	Co	Ci	D	NWC	Net Cash flow = (Co+Ci-D)x(1-Tax)+D+NWC	Df = 1/(1+10%)^Year	Df x Net Cash flows
1	-767,000.00	1,295,000.00	198,400.00		402,752.00	0.909091	366,138.2184
2	-800,300.00	1,359,750.00	198,400.00		422,251.00	0.826446	348,967.6499
3	-835,598.00	1,427,737.50	198,400.00		442,518.49	0.751315	332,470.7793
4	-873,013.88	1,499,124.38	198,400.00		463,580.51	0.683013	316,631.5128
5	-912,674.71	1,574,080.59	198,400.00	42,000.00	527,463.65	0.620921	327,513.2547
						Total = NPV =	657,721.42

Growth of 6% in expense (not on fixed cost) is provided and growth rate of 5% in revenues are provided.

NPV =

$657,721.42