Question

Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $978,000, and its economic life is five years. The machine will be fully depreciated by the straight-line method. The machine will produce 23,000 keyboards each year. The price of each keyboard will be $50 in the first year and will increase by 6 percent per year. The production cost per keyboard will be $15 in the first year and will increase by 6 percent per year. The project will have an annual fixed cost of $198,000 and require an immediate investment of $28,000 in net working capital. The corporate tax rate for the company is 34 percent. The appropriate discount rate is 10 percent What is the NPV

Answer 1

Annual Operating cashflows:
			Year1	YEar2	Yeara3	Year4	Year5
Selling price per unit			50	53	56.18	59.5508	63.12385
Less: variable cost per unit			15	15.9	16.854	17.86524	18.93715
Contribution margin per unit			35	37.1	39.326	41.68556	44.18669
Number of units sold			23000	23000	23000	23000	23000
Total Contribution			805000	853300	904498	958767.9	1016294
Less: Annual fixed cost			198000	198000	198000	198000	198000
Less: Depreciation (978000/5)			195600	195600	195600	195600	195600
Net Income before tax			411400	459700	510898	565167.9	622694
Less: tax @ 34%			139876	156298	173705.3	192157.1	211715.9
After tax Income			271524	303402	337192.7	373010.8	410978
Add: Depreciation			195600	195600	195600	195600	195600
Annual cashflows			467124	499002	532792.7	568610.8	606578
NPV at 10%
			Year0	Year1	YEar2	Yeara3	Year4	Year5
Initial Investment			-978000
Working capital investment			-28000
Annual operating cashflows				467124	499002	532792.7	568610.8	606578
Working capital release								28000
Cashflows			-1006000	467124	499002	532792.7	568610.8	634578
PVF at 10%			1	0.909091	0.826446	0.751315	0.683013	0.620921
Present value of cashflows			-1006000	424658.2	412398.3	400295	388368.8	394023
NPV			1013743