Question

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $520,000. 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 $400,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $245,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 23 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

The deprecation expense per year under the straight line depreciation method is calculated as follows:-

Depreciation expense = 74285.71429

Operating cash flow = ( Revenues - expenses - depreciation ) * ( 1 - tax rate) + Depreciation

Year	Cash outflows	Cash inflows	Depreciation expense	Operating cash flow
0	-520,000	0	0	-520,000
1	245000	400000	74285.71429	136435.7143
2	259700	420000	74285.71429	140516.7143
3	275282	441000	74285.71429	144688.5743
4	291798.92	463050	74285.71429	148949.0459
5	309306.8552	486202.5	74285.71429	153295.3608
6	327865.2665	510512.625	74285.71429	157724.1803
7	347537.1825	536038.2563	74285.71429	162231.5411

The net present value of the project is calculated as follows:-

NPV of the project = $249,524.03