Benton Inc. is considering a five- year investment in a plant that will cost $14

Question

Benton Inc. is considering a five-

year investment

in a plant that will cost $14,000. The plant

produces 2,000 widgets annually. At the end of the year, the variable cost is $6.50

per

widget, the sales price is $9.50

per widget, and the fixed costs are $1,000 annually. The

sales price is growing annually by 5% and variable cost is growing annually by 3%. The cost

of the plant is depreciated over 6 years at the following rates: 20%, 32%, 19.2%, 11.52%,

11.52%, and 5.76%. The salvage value after five years is $1,

750. The appropriate nominal

discount rate is 12% and the corporate tax rate is 35%. The required net working capital is

$1,500 per year and it is recovered at the end of the project. The company expects to sell all

widgets produced each year.

1. Calculate the NPV of this project

Explanation / Answer

Year 1 2 3 4 5 6 Selling Price per unit (Growth rate 5% annually) $9.50 $9.97 $10.47 $11.00 $11.55 $12.12 Variable price Per Unit (Growth Rate 3% annually) $6.50 $6.70 $6.90 $7.10 $7.32 $7.54 Depreciation rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Sales = 2000 x selling price per unit $19,000.00 $19,950.00 $20,947.50 $21,994.88 $23,094.62 $24,249.35 Less: Variable Cost = 2000 x variable cost per unit $13,000.00 $13,390.00 $13,791.70 $14,205.45 $14,631.61 $15,070.56 Less: Fixed Cost $1,000.00 $1,001.00 $1,002.00 $1,003.00 $1,004.00 $1,005.00 Less: Depreciation = $14000 x Dep. rate % $2,800.00 $4,480.00 $2,688.00 $1,612.80 $1,612.80 $806.40 EBIT $2,200.00 $1,079.00 $3,465.80 $5,173.62 $5,846.20 $7,367.39 Less: Tax @ 35% $770.00 $377.65 $1,213.03 $1,810.77 $2,046.17 $2,578.59 Net Income $1,430.00 $701.35 $2,252.77 $3,362.86 $3,800.03 $4,788.80 Add: Depreciation $2,800.00 $4,480.00 $2,688.00 $1,612.80 $1,612.80 $806.40 Operating Cash Flow $4,230.00 $5,181.35 $4,940.77 $4,975.66 $5,412.83 $5,595.20 Initial Investment = (-$14000 + (-$1500) -$15,500.00 Salvage Value - tax on Gain on sale of machine = $1750 - ($1750 x 35%) $1,137.50 Year 5 Cash flow = $5595.20 + 1500 + 1137.50 Year Cash flow PV @ 12% Present Value 0 -$15,500.00 1 -$15,500.00 1 $4,230.00 0.8929 $3,776.79 2 $5,181.35 0.7972 $4,130.54 3 $4,940.77 0.7118 $3,516.74 4 $4,975.66 0.6355 $3,162.12 5 $5,412.83 0.5674 $3,071.39 6 $8,232.70 0.5066 $4,170.94 NPV $6,328.52

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