Question

Nathan Co. is considering replacing its production line used for corn? dogs-in-a-cup. The production line will generate? $1,300,000 in additional revenue per year for each of the next six years. Incremental annual operating costs are projected at? 60% of sales. The new production line equipment will cost? $1,500,000, and will be depreciated according to MACRS as a? five-year asset. The new fixed assets will have a market value of? $50,000 (before? taxes) at the end of six years. The existing production line is fully depreciated and can be sold as scrap for? $20,000 in? after-tax proceeds. Net working capital requirements are? $110,000 for the? six-year life of the? project; the outlay for working capital will be recovered at the end of six years. Nathan? Co.’s tax rate is? 40%, and the required rate of return is? 15%.

What is the projected NPV for the new production line? project?

Answer 1

		Machine A	0	1	2	3	4	5	6
		Initial Investment	-1,500,000
		Working capital	-110,000
		Revneue		1,300,000	1,300,000	1,300,000	1,300,000	1,300,000	1,300,000
	minus	Operating Costs		780000	780000	780000	780000	780000	780000	Revenue * 60%
		Depreciation rate		20%	32%	19%	11.52%	11.52%	5.76%	as per 6 yr marcs schdeule
	minus	Depreciation		300000	480000	285000	172800	172800	86400	Depreciation = Depreciation rate * Initial investment
		EBIT		220,000	40,000	235,000	347,200	347,200	433,600
		Taxes		88,000	16,000	94,000	138,880	138,880	173,440	Taxes = EBIT* Tax rate
		EAT= EBIT - Taxes		132,000	24,000	141,000	208,320	208,320	260,160
	add	Depreciation		300,000	480,000	285,000	172,800	172,800	86,400
	add	Scrap Value of Existing machine	20000
	add	After tax market value of new machine after 6 years							30000
	add	Working capital return							110,000
		Total Cash Flow	-1,590,000	432,000	504,000	426,000	381,120	381,120	486,560
	Excel function	NPV =	64594.41		Discount rate=15%