Question

A new factory at Arcata requires an initial outlay of $3.58 million to be paid immediately. The factory will last for eight additional years, after which it can be sold for a salvage value of $2,440,000. Sales will be $800,000 during the first year of operation and will grow at a rate of 9 percent a year after that. Variable costs will be 30 percent of sales and fixed costs will be $150,000 and grow at a rate of 5% per year. All costs are in cash. Assume cash flows occur at year-end. At a 6 percent required return. (Ignore taxes) The net present value of this project and is __________.

Answer 1

Year	0	1	2	3	4	5	6	7	8
cost of machine	-3580000
sales = current year sale*(1+growth rate) g= 9%		$872,000.00	$950,480.00	$1,036,023.20	$1,129,265.29	$1,230,899.16	$1,341,680.09	$1,462,431.30	$1,594,050.11
less variable cost-30% of sales		$261,600.00	$285,144.00	$310,806.96	$338,779.59	$369,269.75	$402,504.03	$438,729.39	$478,215.03
contribution margin		$610,400.00	$665,336.00	$725,216.24	$790,485.70	$861,629.41	$939,176.06	$1,023,701.91	$1,115,835.08
less fixed cost = current year fixed cost*(1+growth rate)		150000	157500	165375	173643.75	182325.9375	191442.2344	201014.3461	211065.0634
operating profit or cash flow at year end		$460,400.00	$507,836.00	$559,841.24	$616,841.95	$679,303.48	$747,733.83	$822,687.56	$904,770.02
sale proceeds from salvage value									2240000
net operating cash flow	-3580000	$460,400.00	$507,836.00	$559,841.24	$616,841.95	$679,303.48	$747,733.83	$822,687.56	$3,144,770.02
present value factor at 6% = 1/(1+r)^n r= 6%		0.943396226	0.88999644	0.839619283	0.792093663	0.747258173	0.70496054	0.665057114	0.627412371
present value of cash flow = cash flow*pvf at 6%	-3580000	$434,339.62	$451,972.23	$470,053.50	$488,596.60	$507,615.08	$527,122.84	$547,134.22	$1,973,067.61
Net present value = sum of present value of cash flow	1819901.70