Question

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $620,000. 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 $450,000, 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 $295,000, 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 23 percent.

   

Calculate the NPV of the project.

Answer 1

Purchase cost	620,000.00	$
Life	7	years
SLM Depreciation	88,571.43	$
Inflation rate of revenue	4	%
Inflation rate of production cost	5	%
Discount rate	7	%
Corporate tax	23	%

Years	1	2	3	4	5	6	7	Total
Revenue (inflation 4%)	450,000.00	468,000.00	486,720.00	506,188.80	526,436.35	547,493.81	569,393.56
Less:Production cost (inflation 5%)	295,000.00	309,750.00	325,237.50	341,499.38	358,574.34	376,503.06	395,328.21
Less:Depreciation	88,571.43	88,571.43	88,571.43	88,571.43	88,571.43	88,571.43	88,571.43
Net Profit (Revenue - Cost - depreciation)	66,428.57	69,678.57	72,911.07	76,118.00	79,290.58	82,419.32	85,493.92
Corporate tax 23%	15,278.57	16,026.07	16,769.55	17,507.14	18,236.83	18,956.44	19,663.60
Profit after tax (PAT)	51,150.00	53,652.50	56,141.53	58,610.86	61,053.75	63,462.87	65,830.32
Add: depreciation	88,571.43	88,571.43	88,571.43	88,571.43	88,571.43	88,571.43	88,571.43
Cash inflow (PAT + depreciation)	139,721.43	142,223.93	144,712.95	147,182.29	149,625.17	152,034.30	154,401.74
PV factor 7% [1/(1+r)^n]	0.93457944	0.87343873	0.81629788	0.76289521	0.71298618	0.66634222	0.62274974
PV of Inflow (inflow* PV factor)	130,580.77	124,223.89	118,128.88	112,284.66	106,680.68	101,306.88	96,153.65	789,359.40

Total Discounted inflow (a)	789,359.40
Initial outflow (b)	620,000.00
NPV (a-b)	169,359.40