You are considering creating a new product line in warehouse space that originally cost you $48,997...

You are considering creating a new product line in warehouse space that originally cost you $48,997 9 years ago.

The required machinery would cost $9,515, should last 13 years, after which could be scrapped for $852.
Net working capital would need to immediately increase by $3,687, but could return to normal levels after 13 years.
Annual sales and operating costs are expected to be $9,189 and $1,999, respectively.
9% of customers are expected to switch over from your existing product lines.
Your firm's cost of capital (WACC) is 9% and effective corporate tax rate is 37%.
Your firm uses straight line depreciation as its depreciation method.

What is this project's net present value (NPV)? Enter your answer in decimal format to two decimal places (e.g., $1,538.72 would be entered as 1538.72).

Expert Solution





Machinery Cost = $ 9515
Scrap Value =$ 853
Life = 13 years
Depreciation =(Machine cost-Scrap value)/13
	9515-852/13= 666
working capital =$3687
PV of working capital at end of 13th year=3687 PVIF(9%, 13)
			1202.62
PV of scrap at end of 13th year = 853 PVIF (9%, 13)
		278.23

Annual sale =$9189
Operating cost =$1999
WACC = 9%

Calculation of cash inflow

	Sale	9189
Less	operating cost	1999
Less	Depreciation	666
	Income	6524
Less	Taxes(37%)	2414
	Net income	4110
Add	Depreciation	666
	cash flow	4776

PV of cashflow= 4776 PVAF(9%,13)=35757.45


Calculation of PV cash inflow
	($)
PV of cashflow	35757.45
PV of scrap	278.23
PV of working capital	1202.62
PV of cashinflow	37238.3


Calculation of PV cash outflow
	($)
Machinery cost	9515
Working Capital	3687
PV of cash outflow	13202

NPV=	PV of cashinflow -PV of cashoutflow
	NPV= 37238.30-13202
NPV =	$ 24036.30

jeff jeffy answered 2 years ago

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