Question

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $610,000. 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 $445,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 2 percent. Production costs at the end of the first year will be $290,000, in nominal terms, and they are expected to increase at 3 percent per year. The real discount rate is 5 percent. The corporate tax rate is 22 percent.

   

Calculate the NPV of the project.

Answer 1

NPV IS CALCULATED

NPV=F/[(1+i)*n]

F=FUTURE VALUE

i=DISCOUNT OR INTEREST RATE

n=THE NUMBER OF PERIODS IN THE FUTURE CASH FLOW

So as we know the above formula we can calculate the same from the chart above where the cash flow chart is there and the year on year NPV is calculated   and hence the project is having a positive NPV and we can go with the project.