Question

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $540,000. 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 $410,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 2 percent. Production costs at the end of the first year will be $255,000, in nominal terms, and they are expected to increase at 3 percent per year. The real discount rate is 5 percent. The corporate tax rate is 25 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

For determining the net present value first compute the nominal rate for the discounting

As we know that

Real discount rate = (1+ nominal rate) / (1+ inflation rate) - 1

1+ nominal rate = (1+ Real discount rate) * ( 1+ Inflation rate )

1+ Nominal rate = (1+0.05) * (1 + .0.02)

1+ Nominal rate = = (1.05) * (1.02)

1+ Nominal rate = = 1.071

Nominal rate = 7.1%

Now the calculation of the net present value is to be presented in the spreadsheet i.e. presented below:

The following shows the formulas