Question

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $284,000. 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 $119,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 4 percent. Production costs at the end of the first year will be $44,000, in nominal terms, and they are expected to increase at 5 percent per year. The real discount rate is 7 percent. The corporate tax rate is 40 percent.

   

Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

   

NPV

$

Answer 1

	PARTICULARS	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5	YEAR 6	YEAR 7
	Sales	119000.00	123760.00	128710.40	133858.82	139213.17	144781.70	150572.96
Less:	Variable Costs	44000.00	46200.00	48510.00	50935.50	53482.28	56156.39	58964.21
Less:	Depreciation	40571.43	40571.43	40571.43	40571.43	40571.43	40571.43	40571.43
	Profit before tax	34428.57	36988.57	39628.97	42351.89	45159.47	48053.88	51037.33
Less:	Tax @ 40%	13771.43	14795.43	15851.59	16940.75	18063.79	19221.55	20414.93
	Net Income	20657.14	22193.14	23777.38	25411.13	27095.68	28832.33	30622.40
Add:	Depreciation	40571.43	40571.43	40571.43	40571.43	40571.43	40571.43	40571.43
	OCF	61228.57	62764.57	64348.81	65982.56	67667.11	69403.76	71193.82
	PVF @ 7%	0.934579439	0.873438728	0.816297877	0.762895212	0.712986	0.6663422	0.622749742
	PV	57222.96	54821.01	52527.80	50337.78	48245.71	46246.65	44335.94

Now NPV = Present Value of all cash flows - initial investment = 57222.96 + 54821.01 + 52527.80 + 50337.78 + 48245.71 + 46246.65 + 44335.94) - 284000 =  + $69737.85