Question
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NPV.Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS system:...
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 GPSsystem? 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?
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Expert Solution
| 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 | ||||||||
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