Question

NPV.Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS​ system: annual sales of 46,000 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 35​%. 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 ​$1,440,000 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 10​%.

What is the annual operating cash flow of the new GPS​ system?

Answer 1

Calculation of the annual operating cash flow of the new GPS​ system
Sales Units	46000
x Selling price per unit	$16.00
Sales	$736,000.00
Less : Variable Production costs (37%)	$272,320.00
Less : Fixed costs of production	$210,000.00
Less : Depreciation	$240,000.00
Profit before tax	$13,680.00
Less : Tax @ 35%	$4,788.00
Add : Depreciation	$240,000.00
Annual Operating Cash flow	$248,892.00
Calculation of net present value of new GPS system
Year	0	1	2	3	4	5
Initial Investment	-$1,440,000.00
Operating Cash flow		$248,892.00	$248,892.00	$248,892.00	$248,892.00	$248,892.00
After tax sale value of GPS system						$331,000.00
Net Cash flow	-$1,440,000.00	$248,892.00	$248,892.00	$248,892.00	$248,892.00	$579,892.00
x Discount factor @ 10%	1	0.90909091	0.82644628	0.7513148	0.68301346	0.62092132
Present Value	-$1,440,000.00	$226,265.45	$205,695.87	$186,996.24	$169,996.58	$360,067.31
Net Present Value	-$290,978.54
As the net present value of in ew GPS system is negative , Grady Precision Measurement Tools should not add the GPS system to its set of​ products.
Working
Depreciation per year on GPS system using straight line method = [Cost - residual value] / useful life
Depreciation per year on GPS system using straight line method = [$14,40,000 - $0]/6 years = $2,40,000
Calculation of after tax sale value of GPS system
Sale value of GPS system	$380,000.00
Less : Book value of GPS system	$240,000.00
Gain on sale of GPS system	$140,000.00
Tax @ 35% of Gain	$49,000.00
After tax sale value of GPS system [Sale value - Tax]	$331,000.00