Question

In: Economics

You are called by Hope van Dyne to determine whether a new Pym technology for miniaturized...

You are called by Hope van Dyne to determine whether a new Pym technology for miniaturized food delivery is economically desirable. This project will require $35,000,000 in equipment to infuse food with modified Pym particles. Installing and calibrating the equipment to begin operations will cost an additional $2,500,000. This equipment is categorized as seven-years MACRS property. The project will bring a revenue of $28,000,000 in the first year. After that, the revenue will grow 10% every year as more people take a liking to miniature food. The main cost of this project is the salary of lab technicians, which in the first year adds up to $5,000,000. The salary of these workers will increase with the general inflation rate of 2% every year. In addition to this, rent and utilities cost $5,000,000 every year. This cost is expected to stay constant. The project is expected to last six years, at the end of which all the equipment can be sold for 12% of its original value. The MARR is 12%

Assuming a tax rate of 21%, compute income, cash flows, and net present worth over the project life

Solutions

Expert Solution

Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Cost of Equipment -3,75,00,000
Revenue 2,80,00,000 3,08,00,000 3,38,80,000 3,72,68,000 4,09,94,800 4,50,94,280
Salary     50,00,000     51,00,000     52,02,000     53,06,040     54,12,161     55,20,404
Rent, Utility     50,00,000     50,00,000     50,00,000     50,00,000     50,00,000     50,00,000
Depreciation Rate 14.29% 24.49% 17.49% 12.49% 8.93% 8.92%
Depreciation       53,58,750     91,83,750     65,58,750     46,83,750     33,48,750     33,45,000
Net Profit 1,26,41,250 1,15,16,250 1,71,19,250 2,22,78,210 2,72,33,889 3,12,28,876
Tax @ 21%     26,54,663     24,18,413     35,95,043     46,78,424     57,19,117     65,58,064
Net Profit after tax     99,86,588     90,97,838 1,35,24,208 1,75,99,786 2,15,14,772 2,46,70,812
Add Depreciation
Cash Flows 1,53,45,338 1,82,81,588 2,00,82,958 2,22,83,536 2,48,63,522 2,80,15,812
Salvage Value **     46,09,463
Total Cash Flows -3,75,00,000 1,53,45,338 1,82,81,588 2,00,82,958 2,22,83,536 2,48,63,522 3,26,25,275
PVF @12%                       1             0.893             0.797             0.712             0.636             0.567             0.507
PV of Cash flows -3,75,00,000 1,37,01,194 1,45,73,970 1,42,94,652 1,41,61,590 1,41,08,230 1,65,28,979
NPV    4,98,68,616
** Explained below
Book Value        50,21,250
SV        45,00,000
Loss          5,21,250
Tax Saving @21%          1,09,463
Cash Flow        46,09,463

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