Question

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $272,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $107,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $32,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 34 percent.

Answer 1

In the above scenario, we have calculated the net present value of the future cash flows using the given data. And found that NPV( net present value) of future cash flows, which is 360565, is higher than the initial capital outlay of 272000. So, the project is feasible.

NPV (Net present value) = 360565.6 - 272000 = 88566