Question

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $225,000. Of this amount, $180,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $45,000. The depreciated assets will have zero resale value. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. The contract will require an additional investment of $51,000 in working capital at the beginning of the first year and, of this amount, $31,000 will be returned to the Spartan Technology Company after six years. The investment will produce $70,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 8 percent cost of capital.

a. Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

	0	1	2	3	4	5	6
Income before depreciation and taxes		$     70,000.00	$        70,000.00	$           70,000.00	$     70,000.00	$       70,000.00	$        70,000.00
Depreciation on $180000		$     36,000.00	$        57,600.00	$           34,560.00	$     20,736.00	$       20,736.00	$        10,368.00
NOI		$     34,000.00	$        12,400.00	$           35,440.00	$     49,264.00	$       49,264.00	$        59,632.00
Tax at 25%		$       8,500.00	$          3,100.00	$             8,860.00	$     12,316.00	$       12,316.00	$        14,908.00
NOPAT		$     25,500.00	$          9,300.00	$           26,580.00	$     36,948.00	$       36,948.00	$        44,724.00
Add: Depreciation		$     36,000.00	$        57,600.00	$           34,560.00	$     20,736.00	$       20,736.00	$        10,368.00
OCF		$     61,500.00	$        66,900.00	$           61,140.00	$     57,684.00	$       57,684.00	$        55,092.00
Capital expenditure	$        2,25,000.00
Sale of non depreciatble assets							$      -45,000.00
Change in NWC	$            51,000.00						$      -31,000.00
FCF	$      -2,76,000.00	$     61,500.00	$        66,900.00	$           61,140.00	$     57,684.00	$       57,684.00	$    1,31,092.00
PVIF at 8%	1	0.92593	0.85734	0.79383	0.73503	0.68058	0.63017
PV at 15%	$      -2,76,000.00	$     56,944.44	$        57,355.97	$           48,534.90	$     42,399.46	$       39,258.76	$        82,610.20
NPV	$            51,103.73