Question

Sony International has an investment opportunity to produce a new stereo HDTV. The required investment on January 1 of this year is $155 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the project. The firm is in the 34 percent tax bracket. The price of the product will be $515 per unit, in real terms, and will not change over the life of the project. Labor costs for Year 1 will be $15.65 per hour, in real terms, and will increase at 2 percent per year in real terms. Energy costs for Year 1 will be $3.80 per physical unit, in real terms, and will increase at 3 percent per year in real terms. The inflation rate is 4 percent per year. Revenues are received and costs are paid at year-end. Refer to the following table for the production schedule:

	Year 1		Year 2		Year 3		Year 4
Physical production, in units	135,000		145,000		165,000		155,000
Labor input, in hours	1,140,000		1,220,000		1,380,000		1,300,000
Energy input, in physical units	230,000		250,000		270,000		255,000

The real discount rate for the company is 3 percent.

Calculate the NPV of this project. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.)

NPV           $

Answer 1

The values in the questions are given in real terms and also the discount rate is given in real terms. Hence, for NPV calculation, the values in real terms can be taken as such without giving impact to inflation to convert to nominal terms.

Depreciation per year needs to be converted to real terms discounting at the inflation rates.

NPV is $37,813,741.43

Workings: