A Company plans to invest in a new manufacturing project over the next 9 years.

Question

A Company plans to invest in a new manufacturing project over the next 9 years. The project will require an initial investment of $135 000, and an additional investment of $34 000 in year 4. Starting in year 2, the company will reduce their labour costs by $11500 a year for the next 4 years and $6000 a year for the next 3 years. At the end of the project, there will be a residual value of $18 000. If the company's cost of capital is 12% calculate the net prestent value for this project, and determine if the project was profitable for the company. Show all Cash Flow Entries,

Explanation / Answer

Year cash Flow Enties Cash Flow Discount factor 12% Discounted cash flow 0 Intial Investment -135000 1 -135000 1 No cash flow 0 0.8929 0 2 Cash Saving 11500 0.7972 9167.73 3 Cash Saving 11500 0.7118 8185.473 4 Cash Saving 11500 0.6355 7308.458 4 additional Investment -34000 0.5674 -19292.5 5 Cash Saving 11500 0.5066 5826.258 6 Cash Saving 600 0.4523 271.4095 7 Cash Saving 6000 0.4039 2423.299 8 Cash Saving 6000 0.3606 2163.66 9 Salvage Value 18000 0.3220 5795.518 NPV -113151

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