Sanders Enterprises, Inc., has been considering the purchase of a new manufactur
ID: 2701348 • Letter: S
Question
Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $157,500. The facility is to be fully depreciated on a straight-line basis over 7 years. It is expected to have no resale value after the 7 years. Operating revenues from the facility are expected to be $89,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5.3 percent. Production costs at the end of the first year will be $17,000, in nominal terms, and they are expected to increase at 6.3 percent per year. The real discount rate is 10 percent. The corporate tax rate is 30 percent. Sanders has other ongoing profitable operations.
What is the NPV?
Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $157,500. The facility is to be fully depreciated on a straight-line basis over 7 years. It is expected to have no resale value after the 7 years. Operating revenues from the facility are expected to be $89,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5.3 percent. Production costs at the end of the first year will be $17,000, in nominal terms, and they are expected to increase at 6.3 percent per year. The real discount rate is 10 percent. The corporate tax rate is 30 percent. Sanders has other ongoing profitable operations.
What is the NPV?
Explanation / Answer
Hi,
Please find the answer as follows:
Initial Year Cash Flow = -157500
NPV = -157500 + 57150/(1+.10) + 59702/(1+.10)^2 + 62382/(1+.10)^3 + 65196/(1+.10)^4 + 68151/(1+.10)^5 + 71253/(1+.10)^6 + 74510/(1+.10)^7 = 155966
Answer is 155966
Operating
Revenues Production Costs Depreciation Income Before Tax Net Income Net Cash Flows Year 1 89000 17000 22500 49500 34650 57150 Year 2 93717 18071 22500 53146 37202 59702 Year 3 98684 19209 22500 56975 39882 62382 Year 4 103914 20420 22500 60995 42696 65196 Year 5 109422 21706 22500 65216 45651 68151 Year 6 115221 23074 22500 69647 48753 71253 Year 7 121328 24527 22500 74301 52010 74510
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