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. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Answer 1

Year	0	1	2	3	4	5	6	7
Initial Investment	2,83,000.00
Revenues		1,18,000.00	1,22,720.00	1,27,628.80	1,32,733.95	1,38,043.31	1,43,565.04	1,49,307.64
Less:- Production Cost		43,000.00	45,150.00	45,150.00	45,150.00	45,150.00	45,150.00	45,150.00
EBIT		75,000.00	77,570.00	82,478.80	87,583.95	92,893.31	98,415.04	1,04,157.64
Less:- Dep		40,428.57	40,428.57	40,428.57	40,428.57	40,428.57	40,428.57	40,428.57
Earnings after Dep		34,571.43	37,141.43	42,050.23	47,155.38	52,464.74	57,986.47	63,729.07
Taxes @34%		11,754.29	12,628.09	14,297.08	16,032.83	17,838.01	19,715.40	21,667.88
Earnings after tax and dep		22,817.14	24,513.34	27,753.15	31,122.55	34,626.73	38,271.07	42,061.19
Add:- Dep		40,428.57	40,428.57	40,428.57	40,428.57	40,428.57	40,428.57	40,428.57
Cash Flow after Tax before dep		63,245.71	64,941.91	68,181.72	71,551.12	75,055.30	78,699.64	82,489.76
TOTAL FREE CF	-2,83,000.00	63,245.71	64,941.91	68,181.72	71,551.12	75,055.30	78,699.64	82,489.76
PVF @ 7%	1.000	0.935	0.873	0.816	0.763	0.713	0.666	0.623
Present Value	-2,83,000.000	59,108.144	56,722.783	55,656.595	54,586.009	53,513.391	52,440.895	51,370.476
	NPV		1,00,398.293$