Heer Enterprises needs 225,000 cartons of machine screws per year to support its

Question

Heer Enterprises needs 225,000 cartons of machine screws per year to support its manufacturing needs over the next 7 years. It will cost $1,170,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. Your fixed production costs will be $360,000 per year, and your variable production costs will be $12.75 per carton.The price per carton is $17. Your tax rate is 40 percent and you require a 13 percent return on your investment. What is the NPV of this project?

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The Course is BMGT 340

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Investment = -1170000

Annual Cash Inflow = (225000*17 - 225000*12.75 - 360000)*(1-.40) + 1170000/7*(.40) = 424607.14

NPV = -1170000 + 424607.14/(1+.13)^1 + 424607.14/(1+.13)^2 + 424607.14/(1+.13)^3 + 424607.14/(1+.13)^4 + 424607.14/(1+.13)^5 + 424607.14/(1+.13)^6 + 424607.14/(1+.13)^7 = 707871.97 or 707872

Answer is 707871.97 or 707872.

Thanks.

Notes:

Annual Cash Inflow = (Number of Cartons*Price Per Carton - Number of Cartons*Variable Production Cost - Fixed Cost)*(1-Tax Rate) + Depreciation*Tax Rate.

Thanks.

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