Question

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $288,000. 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 $123,000, 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 $48,000, 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 40 percent. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) THE ANSWER IS NOT $66,562..52

Answer 1

NOMINAL DISCOUNT RATE:
=(1+real)*(1+inflation)-1
=1.07*1.04-1=11.28%
NOMINAL CASH FLOWS:
free cash flow at the end of year 1=(123000-48000-288000/7)*(1-40%)+288000/7=61457.14286
free cash flow at the end of year 2=(123000*1.04-48000*1.05-288000/7)*(1-40%)+288000/7=62969.14286
free cash flow at the end of year 3=(123000*1.04^2-48000*1.05^2-288000/7)*(1-40%)+288000/7=64527.22286
free cash flow at the end of year 4=(123000*1.04^3-48000*1.05^3-288000/7)*(1-40%)+288000/7=66132.50606
free cash flow at the end of year 5=(123000*1.04^4-48000*1.05^4-288000/7)*(1-40%)+288000/7=67786.12459
free cash flow at the end of year 6=(123000*1.04^5-48000*1.05^5-288000/7)*(1-40%)+288000/7=69489.21805
free cash flow at the end of year 7=(123000*1.04^6-48000*1.05^6-288000/7)*(1-40%)+288000/7=71242.93197

NPV=-288000+61457.14286/1.1128+62969.14286/1.1128^2+64527.22286/1.1128^3+66132.50606/1.1128^4+67786.12459/1.1128^5+69489.21805/1.1128^6+71242.93197/1.1128^7
=18064.52658