Sanders Enterprises, Inc., has been considering the purchase of a new manufactur

Question

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $281,000. 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 $116,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 3 percent. Production costs at the end of the first year will be $41,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 6 percent. The corporate tax rate is 38 percent. Sanders has other ongoing profitable operations.

    

   

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $281,000. 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 $116,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 3 percent. Production costs at the end of the first year will be $41,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 6 percent. The corporate tax rate is 38 percent. Sanders has other ongoing profitable operations.

Calculate the NPV of the project. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

    

  NPV $   

   

Should the company accept the project? Accept Reject

Explanation / Answer

1. NPV = $43573

2. Yes, company should accept the project as the NPV is positive

working note

Nominal discount rate = (1+ RDR) * ( 1 + Inflation rate) -1

NDR = (1+0.06) * (1+ 0.03)- 1

NDR = 9.18

Present value of cash outflow Purchase new manufactuging facility $281000 Present value factor (At Y=0) 1 Present value of cash outflow $281000

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