Question

NPV. Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS​ system: annual sales of 45,000 units at $17 a​ unit, production costs at 39​% of sales​ price, annual fixed costs for production at $210,000. The company tax rate is 38​%. 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 10​%.

What is the annual operating cash flow of the new GPS​ system? $________ (Round to the nearest​ dollar.)

What is the​ after-tax cash flow of the GPS system at​ disposal? $_________ (Round to the nearest​ dollar.)

What is the NPV of the new GPS​ system? $_________ ​(Round to the nearest​ dollar.)

Should Grady Precision Measurement Tools add the GPS system to its set of​ products? ​(Select the best​ response.)

A. ​No, because the NPV is negative which means the projected annual rate of return on the project is less than the cost of capital.

B. ​Yes, because the project will generate enough wealth to give investors an adequate yield.

Answer 1

1-
sales	765000
production cost=39% of sales	298350
depreciation =1430000/6	238333.3333
fixed cost	210000
operating profit	18316.66667
less tax-38%	6960.333333
after tax net income	11356.33333
add depreciation	238333.3333
annual operating cash flow	249689.6667
2-
after tax sale proceeds	380000*(1-.38)	235600
Year	cash flow	present value of cash flow = operating cash flow/(1+r)^n r = 10%	present value of cash flow = operating cash flow/(1+r)^n r = 10%
0	-1430000	-1430000/1.1^0	-1430000
1	249689.6667	249689.66/1.1^1	226990.6
2	249689.6667	249689.66/1.1^2	206355.0909
3	249689.6667	249689.66/1.1^3	187595.5372
4	249689.6667	249689.66/1.1^4	170541.3974
5	249689.6667	249689.66/1.1^5	155037.634
6	485289.6667	485289.66/1.1^6	273933.3616
net present value = sum of present value of operating cash flow			-209546
3-
No	​No, because the NPV is negative which means the projected annual rate of return on the project is less than the cost of capital.