Question

After spending $10,400 on​ client-development, you have just been offered a big production contract by a new client. The contract will add $193,000 to your revenues for each of the next five years and it will cost you $105,000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully​ depreciated, but could be sold for $48,000 now. If you use it in the​ project, it will be worthless at the end of the project. You will buy new equipment valued at $35,000 and use the​ 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $75,000 per year. Since she is busy with ongoing​ projects, you are planning to hire an assistant at $38,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 to $30,000.It will return to $20,000 at the end of the project. Your​ company's tax rate is 35% and your discount rate is 16%. What is the NPV of the​ contract? Note​:Assume that the equipment is put into use in year 1.

Calculate the free cash flows​ below:  ​(Round to the nearest​ dollar.)

		Year 0
Sales	$
- Cost of Goods Sold	$
Gross Profit	$
- Annual Cost	$
- Depreciation	$
EBIT	$
- Tax	$
Incremental Earnings	$
+ Depreciation	$
- Incremental Working Capital	$
- Opportunity Cost	$
- Capital Investment	$
Incremental Free Cash Flow	$

Answer 1

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