Question

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $273,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $108,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 3 percent. Production costs at the end of the first year will be $33,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 6 percent. The corporate tax rate is 38 percent.

Calculate the NPV of the project. (P.S. the NPV is not 88395.63 since I tried that answer already.)

Answer 1

Discounting rate = (1+Real rate) x (1+Inflation rate) -1

= (1+6%) x (1+3%) -1

= 9.18%

Year	Cash outflows	Cash inflows	Depreciation = D = =273000/7 = 39000	Net Working capital = NWC	Net Cash flows = Cash outflow + NWC	Discount factor = Df = 1/(1+Rate)^Year	Present Values
0	-273000.00	0.00	0.00		-273,000.00	1.000000	-273,000.00
	Co	Ci	D	NWC	Net Cash flow = (Co+Ci-D)x(1-Tax)+D+NWC	Df = 1/(1+9.18%)^Year	Df x Net Cash flows
1	-33,000.00	108,000.00	39,000.00		61,320.00	0.915919	56,164.1531
2	-34,320.00	111,240.00	39,000.00		62,510.40	0.838907	52,440.4121
3	-35,692.80	114,577.20	39,000.00		63,728.33	0.768371	48,966.9991
4	-37,120.51	118,014.52	39,000.00		64,974.28	0.703765	45,726.6259
5	-38,605.33	121,554.95	39,000.00		66,248.76	0.644591	42,703.3569
6	-40,149.55	125,201.60	39,000.00		67,552.27	0.590393	39,882.3895
7	-41,755.53	128,957.65	39,000.00		68,885.31	0.540752	37,249.8717
						Total = NPV =	50,133.81