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 $276,000. 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 $111,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 4 percent. Production costs at the end of the first year will be $36,000, in nominal terms, and they are expected to increase at 5 percent per year. The real discount rate is 7 percent. The corporate tax rate is 39 percent. Sanders has other ongoing profitable operations. Calculate the NPV of the project.

Explanation / Answer

YEAR 1 2 3 4 5 6 7

RCF(REVENUE) $111000 115440 120058 124860 129854 135048 140450

YEAR 1 2 3 4 5 6 7

RCF(COST)   $36000 37800 39690 41675 43758 45946 48243

YEAR 1 2 3 4 5 6 7

RCF NET OF COST $75000 77640 80368 83185 86096 89102 92207

LESS-DEPRICIATION   ($39429) ($39429)   ($39429) ($39429) ($39429) ($39428) ($39427)

CF AFTER DEPRICIATION $35571 38211 40939 43756 46667 49574 52780

AFTER TAX CASH FLOW $20987 22544 24154 25816 27534 29249 31140

ADD- DEPRICIATION $39429 $39429 $39429 $39429 $39429 $39428 $39427

NET REAL CASH FLOW   $60416 61973 63583 65245 66963 68677 70567

YEAR RCF(NET)   DISCOUNTING FACTOR 10   DISCOUNTED CASH FLOW

0 ($276000) 1.0000 ($276000)

1 60416 0.9091 54924

2 61973 0.8264 51214

3 63583 0.7513 47770

4 65245 0.6830 44562

5 66963 0.6209 41577

6 68677 0.5645 38768

7 70567 0.5132 36215

  NPV =$39030

NOTE;-

RCF= REAL CASH FLOW

CF= CASH FLOW

AFTER TAX CASH FLOW= (1-0.39) * CASH FLOW AFTER DEPRECIATION

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