Project Analysis and Inflation Mustaine Enterprises, Inc., has been considering
ID: 2709722 • Letter: P
Question
Project Analysis and Inflation Mustaine 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. Mustaine has other ongoing profitable operations. Should the company accept the project?
Year 0
Year 1
Year 2
Year3
Year4
Year5
Year6
Year7
Revenues
$107,000
$112,350
$117,967.5
$123,865.9
$130,059.2
$136,562.1
$143,390.2
Costs
32,000
33,920
35,955.2
38,112.51
40,399.26
42,823.22
45,392.61
Depreciation
EBT
Taxes @34%
Net Income
OFC
Capital Spending
($272,000)
Cash Flow
($272,000)
Solve for NPV
Year 0
Year 1
Year 2
Year3
Year4
Year5
Year6
Year7
Revenues
$107,000
$112,350
$117,967.5
$123,865.9
$130,059.2
$136,562.1
$143,390.2
Costs
32,000
33,920
35,955.2
38,112.51
40,399.26
42,823.22
45,392.61
Depreciation
EBT
Taxes @34%
Net Income
OFC
Capital Spending
($272,000)
Cash Flow
($272,000)
Explanation / Answer
Solution :
Year 0
Year 1
Year 2
Year3
Year4
Year5
Year6
Year7
Revenues
107,000.00
107,000.00
107,000.00
107,000.00
107,000.00
107,000.00
107,000.00
Costs
32,000.00
32,000.00
32,000.00
32,000.00
32,000.00
32,000.00
32,000.00
Depreciation
38,857.14
38,857.14
38,857.14
38,857.14
38,857.14
38,857.14
38,857.14
EBT
36,142.86
36,142.86
36,142.86
36,142.86
36,142.86
36,142.86
36,142.86
Taxes @34%
12,288.57
12,288.57
12,288.57
12,288.57
12,288.57
12,288.57
12,288.57
Net Income
23,854.29
23,854.29
23,854.29
23,854.29
23,854.29
23,854.29
23,854.29
62,711.43
62,711.43
62,711.43
62,711.43
62,711.43
62,711.43
62,711.43
Discounting factor at 8%
0.92593
0.85734
0.79383
0.73503
0.68058
0.63017
0.58349
PV of Cash inflow
58,066.14
53,764.94
49,782.35
46,094.77
42,680.34
39,518.84
36,591.52
Total of pv of cash inflow
326,498.90
PV of Cash outflow
272,000.00
NPV
54,498.90
Hence company should accept the project as NPV is positive
Year 0
Year 1
Year 2
Year3
Year4
Year5
Year6
Year7
Revenues
107,000.00
107,000.00
107,000.00
107,000.00
107,000.00
107,000.00
107,000.00
Costs
32,000.00
32,000.00
32,000.00
32,000.00
32,000.00
32,000.00
32,000.00
Depreciation
38,857.14
38,857.14
38,857.14
38,857.14
38,857.14
38,857.14
38,857.14
EBT
36,142.86
36,142.86
36,142.86
36,142.86
36,142.86
36,142.86
36,142.86
Taxes @34%
12,288.57
12,288.57
12,288.57
12,288.57
12,288.57
12,288.57
12,288.57
Net Income
23,854.29
23,854.29
23,854.29
23,854.29
23,854.29
23,854.29
23,854.29
62,711.43
62,711.43
62,711.43
62,711.43
62,711.43
62,711.43
62,711.43
Discounting factor at 8%
0.92593
0.85734
0.79383
0.73503
0.68058
0.63017
0.58349
PV of Cash inflow
58,066.14
53,764.94
49,782.35
46,094.77
42,680.34
39,518.84
36,591.52
Total of pv of cash inflow
326,498.90
PV of Cash outflow
272,000.00
NPV
54,498.90
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