Question

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $560,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to be $420,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $265,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 22 percent.

   

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

Answer 1

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Operating Revenues	-	420,000	441,000	463,050	486,203	510,513	536,038	562,840
Less: Production costs	-	265,000	280,900	297,754	315,619	334,556	354,630	375,908
Gross profit before depreciation	-	155,000	160,100	165,296	170,583	175,956	181,408	186,933
Less: Depreciation	-	80,000	80,000	80,000	80,000	80,000	80,000	80,000
Profit before tax	-	75,000	80,100	85,296	90,583	95,956	101,408	106,933
Less: Tax at 22%	-	18,750	20,025	21,324	22,646	23,989	25,352	26,733
Operating Income	-	56,250	60,075	63,972	67,937	71,967	76,056	80,199
Add back depreciation	-	80,000	80,000	80,000	80,000	80,000	80,000	80,000
Cash flow from operations	-	136,250	140,075	143,972	147,937	151,967	156,056	160,199
Initial Investment	-$560,000	-	-	-	-	-	-	-
Total Cash flows	-$560,000	136,250	140,075	143,972	147,937	151,967	156,056	160,199
NPV	204,520.32

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