Question

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $570,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to be $425,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 4 percent. Production costs at the end of the first year will be $270,000, in nominal terms, and they are expected to increase at 5 percent per year. The real discount rate is 7 percent. The corporate tax rate is 23 percent.

Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer : Calculation of Net Present Value of Project

Discount Rate to be used :

(1 + Rate) = (1 + Real Rate interest) * (1 + Inflation rate)

(1 + Rate) = (1 + 0.07) * (1 + 0.04)

Rate = 1.1128 - 1

= 0.1128 or 11.28%

Below is the sheet showing Calculation of Net Present Value :

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Initial Investment	570000
Annual Sales Revenue		425000	442000	459680	478067.2	497189.9	517077.5	537760.6
Cash Operating Cost		270000	283500	297675	312558.8	328186.7	344596	361825.8
Less : Depreciation (570000/7)		81428.57	81428.57	81428.57	81428.57	81428.57	81428.57	81428.57
Earning before taxes		73571.43	77071.43	80576.43	84079.88	87574.63	91052.89	94506.19
Taxes @ 23%		-16921.4	-17726.4	-18532.6	-19338.4	-20142.2	-20942.2	-21736.4
Earnings After Taxes		56650	59345	62043.85	64741.51	67432.46	70110.73	72769.77
Add : Depreciation		81428.57	81428.57	81428.57	81428.57	81428.57	81428.57	81428.57
Operating Cash Flows	570000	138078.6	140773.6	143472.4	146170.1	148861	151539.3	154198.3
PV Factor @ 11.28%	1	0.898634	0.807543	0.725686	0.652126	0.586023	0.52662	0.473239
PV of Net Cash flows (Inflow)		124082.1	113680.7	104115.9	95321.31	87235.94	79803.62	72972.61
PV of Net Cash flows (Outflow)	570000
The net present value (NPV) of this project is		= $ 107212.2316 or $ 107212.23
NPV = PV of cash inflow - PV of cash outflow
= 677212.2316- 570000
= $ 107212.2316 or $ 107212.23