You are considering an investment in a new factory that will operate for 3 years. The...

You are considering an investment in a new factory that will operate for 3 years. The initial investment will be 453429. The nominal revenues at the end of Year 1 will be $250000. Revenues will grow at a real rate of 1%. Inflation will be 2%. The nominal costs at the end of Year 1 will be $30000. Costs will grow at a nominal 4% rate. The investment will depreciated on a straight line basis to zero over 3 years. It will have zero market salvage value at the end of 3 years. The required real rate of return for the investment is 8%. The tax rate is 21%.

What is the NPV of the project?

a. $-68003

b. $104301

c. $68829

d. $138025

e. $68028

Please show solution using Real Analysis

Solutions

Expert Solution

NPV of Project = e. $68028

Period	Year 0	Year 1	Year 2	Year 3
Investment (cash outflow)	453,429.00
Revenue		250,000.00	257,550.00	265,328.01
Cost		30,000.00	31,200.00	32,448.00
Depreciation (1/3 every year)		151,143.00	151,143.00	151,143.00
Profit before tax (Revenue - Cost - Depreciation)		68,857.00	75,207.00	81,737.01
Tax @ 21%		14,459.97	15,793.47	17,164.77
Profit after Tax (PBT - Tax)		54,397.03	59,413.53	64,572.24
Cash Inflow (PAT + Depreciation)		205,540.03	210,556.53	215,715.24
Discounting factor @ 2% for inflation	1.0000	0.9804	0.9612	0.9423
Real Inflow / (outflow)	(453,429.00)	201,509.83	202,380.36	203,273.29
Discounting factor for 8%	1.0000	0.9259	0.8573	0.7938
Year wise net present value	(453,429.00)	186,583.18	173,508.54	161,364.89
Total Net Present Value (Sum of above)	68,027.61

Working note:
Revenue next year = Current year * Growth rate * Inflation rate (11.011.02)
Cost next year = Current year cost * Nominal rate (1*1.04)

ekkarill92 answered 1 year ago

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