Question

NPV.  Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS​ system: annual sales of 44,000 units at ​$16 a​ unit, production costs at 37​% of sales​ price, annual fixed costs for production at $ 210,000. The company tax rate is 30​%. What is the annual operating cash flow of the new GPS​ system? Should Grady Precision Measurement Tools add the GPS system to its set of​ products? The initial investment is ​$1,430,000 for manufacturing​ equipment, which will be depreciated over six years​ (straight line) and will be sold at the end of five years for $ 380,000. The cost of capital is 12​%. What is the annual operating cash flow of the new GPS​ system?

Answer 1

Time line		0	1	2	3	4	5	6
Cost of new machine		-1430000
=Initial Investment outlay		-1430000
Unit sales			44000	44000	44000	44000	44000	44000
Profits	=no. of units sold * (sales price - variable cost)		443520	443520	443520	443520	443520	443520
Fixed cost			-210000	-210000	-210000	-210000	-210000	-210000
-Depreciation	Cost of equipment/no. of years		-238333.333	-238333.33	-238333.33	-238333.33	-238333.3	-238333.3
=Pretax cash flows			-4813.33333	-4813.3333	-4813.3333	-4813.3333	-4813.333	-4813.333
-taxes	=(Pretax cash flows)*(1-tax)		-3369.33333	-3369.3333	-3369.3333	-3369.3333	-3369.333	-3369.333
+Depreciation			238333.3333	238333.333	238333.333	238333.333	238333.33	238333.33
=after tax operating cash flow			234964	234964	234964	234964	234964	234964
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)							266000
+Tax shield on salvage book value	=Salvage value * tax rate							0
=Terminal year after tax cash flows								266000
Total Cash flow for the period		-1430000	234964	234964	234964	234964	234964	500964
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928	1.57351936	1.7623417	1.9738227
Discounted CF=	Cashflow/discount factor	-1430000	209789.2857	187311.862	167242.734	149323.87	133324.88	253803.95
NPV=	Sum of discounted CF=	-329203.4114

Do not buy as NPV is negative