Question

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $510,000. 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 $395,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 3 percent. Production costs at the end of the first year will be $240,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 6 percent. The corporate tax rate is 22 percent.

   

Calculate the NPV of the project.

Answer 1

NPV

280860.39

Workings

Year	Initial cost	Tax shield	Operating revenues after tax	Operating costs after tax	Net Cash flow
0	-510000				-510000.00
1		16028.57	308100.00	-187200.00	136928.57
2		16028.57	317343.00	-194688.00	138683.57
3		16028.57	326863.29	-202475.52	140416.34
4		16028.57	336669.19	-210574.54	142123.22
5		16028.57	346769.26	-218997.52	143800.31
6		16028.57	357172.34	-227757.42	145443.49
7		16028.57	367887.51	-236867.72	147048.36