Question

 

Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $283,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $118,000, 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 $43,000, 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 34 percent.

Answer 1

Year	Initial Investment	Revenue incresed by 4%	Production Cost increased by5%	Depreciation	EBIT	Tax @ 34%	Net Income	Depreciation	Operating cash flow	PV @11.28%	Present Value
0	-$283,000.00								-$283,000.00	1.0000	-$283,000.00
1		$118,000.00	$43,000.00	$40,428.57	$34,571.43	$11,754.29	$22,817.14	$40,428.57	$63,245.71	0.8978	$105,943.62
2		$122,720.00	$45,150.00	$40,428.57	$37,141.43	$12,628.09	$24,513.34	$40,428.57	$64,941.91	0.8061	$98,923.83
3		$127,628.80	$47,407.50	$40,428.57	$39,792.73	$13,529.53	$26,263.20	$40,428.57	$66,691.77	0.7237	$92,369.17
4		$132,733.95	$49,777.88	$40,428.57	$42,527.51	$14,459.35	$28,068.15	$40,428.57	$68,496.73	0.6498	$86,248.82
5		$138,043.31	$52,266.77	$40,428.57	$45,347.97	$15,418.31	$29,929.66	$40,428.57	$70,358.23	0.5834	$80,534.00
6		$143,565.04	$54,880.11	$40,428.57	$48,256.36	$16,407.16	$31,849.20	$40,428.57	$72,277.77	0.5238	$75,197.85
7		$149,307.64	$57,624.11	$40,428.57	$51,254.96	$17,426.69	$33,828.27	$40,428.57	$74,256.85	0.4703	$70,215.27
											$326,432.56
(1 + Nominal Rate) = (1 + Real Rate) × (1 + Inflation Rate)
(1+ Nominal Rate) = (1+7%) x (1+4%)
Nominal rate return = (1.07 x 1.04 ) -1	11.28%