In: Accounting
Van Doren Corporation is considering producing a new temperature
regulator called Digidial. Marketing data indicate that the company
will be able to sell 10,000 units per year at $1,500.The product
will be produced in a section of an existing factory that is
currently not in use. To produce Digidial, Van Doren must buy a
machine that costs $1,000,000. The machine has an expected life of
10 years and will have an ending residual value of $30,000. Van
Doren will depreciate the machine over ten years using the
straight-line method for both tax and financial reporting purposes.
In addition to the cost of the machine, the company will incur
incremental manufacturing costs of $370,000 for component parts,
$500,000 for direct labor, and $200,000 of miscellaneous costs. Van
Doren has a tax rate of 20 percent, and the company’s required rate
of return is 15 percent.
A. Compute the Net Present Value of this project.
Calculation of Net Present Value | |||
Sl. No. | Particulars | Basis | Years 1-10 |
A | Sales | (10,000 units*$1,500) | $ 15,000,000.00 |
B | Less: Costs | ||
a)Depreciation | ($1,000,000-$30,000)/10 years | $ (97,000.00) | |
b)Manufacturing Costs | Given | $ (370,000.00) | |
c)Direct Labor | Given | $ (500,000.00) | |
d)Miscellaneous Costs | Given | $ (200,000.00) | |
C | Net Profit (A-B) | $ 13,833,000.00 | |
D | Less: Tax at 20% | ($13,833,000*20%) | $ (2,766,600.00) |
E | Profit After Tax (C-D) | $ 11,066,400.00 | |
F | Add: Non Cash Expenses | ||
a)Depreciation | Refer B(a) | $ 97,000.00 | |
G | Net Cash Inflow (F+G) | $ 11,163,400.00 |
Year | Cash Flows | Annuity PVF @15% | Present Value |
1-10 years | $ 11,163,400.00 | 5.0188 | $ 56,026,521.68 |
(1-((1+0.15)^(-10)))/0.15 | |||
Year 10 | $ 30,000.00 | 0.2472 | $ 7,415.54 |
(1/(1.15^10)) | |||
Present Value of Cash Inflows (a) | $ 56,033,937.22 | ||
Less: Present Value of Cash Outflow (b) | $ (1,000,000.00) | ||
Net Present Value (a-b) | $ 55,033,937.22 |