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 $289,000. 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 $124,000, 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 $49,000, 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 34 percent. Sanders has other ongoing profitable operations. Calculate the NPV of the project.

Explanation / Answer

Statement showing NPV Particulars Time PVf@6% Amount PV Cash Outflows                            -                  1.00            (289,000.00)              (289,000.00) PV of Cash outflows              (289,000.00) Cash inflows                     1.00            0.9434                63,537.14                   59,940.70 Cash inflows                     2.00            0.8900                64,698.74                   57,581.65 Cash inflows                     3.00            0.8396                65,882.25                   55,316.01 Cash inflows                     4.00            0.7921                67,087.82                   53,139.84 Cash inflows                     5.00            0.7473                68,315.56                   51,049.36 Cash inflows                     6.00            0.7050                69,565.58                   49,040.99 Cash inflows                     7.00            0.6651                70,837.97                   47,111.29 PV of Cash Inflows                373,179.84 NPV                   84,179.84 Particulars Year1 Year2 Year3 Year4 Year5 Year6 Year7 Operating Revenue        124,000.00 127,720.00              131,551.60                135,498.15             139,563.09             143,749.99 148,062.48 Production Costs          49,000.00      50,960.00                52,998.40                   55,118.34               57,323.07               59,615.99     62,000.63 Depreciation(289000/7)          41,285.71      41,285.71                41,285.71                   41,285.71               41,285.71               41,285.71     41,285.71 Income          33,714.29      35,474.29                37,267.49                   39,094.10               40,954.31               42,848.28     44,776.14 Tax @34%          11,462.86      12,061.26                12,670.95                   13,291.99               13,924.46               14,568.41     15,223.89 Income after tax          22,251.43      23,413.03                24,596.54                   25,802.10               27,029.84               28,279.86     29,552.25 Depreciation(289000/7)          41,285.71      41,285.71                41,285.71                   41,285.71               41,285.71               41,285.71     41,285.71 Cash flows after tax          63,537.14      64,698.74                65,882.25                   67,087.82               68,315.56               69,565.58     70,837.97

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