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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 (1*1.01*1.02)
Cost next year = Current year cost * Nominal rate (1*1.04)

ekkarill92 answered 2 years ago
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