Sanders Enterprises, Inc., has been considering the purchase of a new manufactur
ID: 2816042 • Letter: S
Question
Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $273,000. 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 $108,000, 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 $33,000, 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.
Calculate the NPV of the project.
(P.S. the NPV is not 88395.63 since I tried that answer already.)
Calculate the NPV of the project.
(P.S. the NPV is not 88395.63 since I tried that answer already.)
Explanation / Answer
Discounting rate = (1+Real rate) x (1+Inflation rate) -1
= (1+6%) x (1+3%) -1
= 9.18%
Year
Cash outflows
Cash inflows
Depreciation = D = =273000/7 = 39000
Net Working capital = NWC
Net Cash flows = Cash outflow + NWC
Discount factor = Df = 1/(1+Rate)^Year
Present Values
0
-273000.00
0.00
0.00
-273,000.00
1.000000
-273,000.00
Co
Ci
D
NWC
Net Cash flow = (Co+Ci-D)x(1-Tax)+D+NWC
Df = 1/(1+9.18%)^Year
Df x Net Cash flows
1
-33,000.00
108,000.00
39,000.00
61,320.00
0.915919
56,164.1531
2
-34,320.00
111,240.00
39,000.00
62,510.40
0.838907
52,440.4121
3
-35,692.80
114,577.20
39,000.00
63,728.33
0.768371
48,966.9991
4
-37,120.51
118,014.52
39,000.00
64,974.28
0.703765
45,726.6259
5
-38,605.33
121,554.95
39,000.00
66,248.76
0.644591
42,703.3569
6
-40,149.55
125,201.60
39,000.00
67,552.27
0.590393
39,882.3895
7
-41,755.53
128,957.65
39,000.00
68,885.31
0.540752
37,249.8717
Total = NPV =
50,133.81
Year
Cash outflows
Cash inflows
Depreciation = D = =273000/7 = 39000
Net Working capital = NWC
Net Cash flows = Cash outflow + NWC
Discount factor = Df = 1/(1+Rate)^Year
Present Values
0
-273000.00
0.00
0.00
-273,000.00
1.000000
-273,000.00
Co
Ci
D
NWC
Net Cash flow = (Co+Ci-D)x(1-Tax)+D+NWC
Df = 1/(1+9.18%)^Year
Df x Net Cash flows
1
-33,000.00
108,000.00
39,000.00
61,320.00
0.915919
56,164.1531
2
-34,320.00
111,240.00
39,000.00
62,510.40
0.838907
52,440.4121
3
-35,692.80
114,577.20
39,000.00
63,728.33
0.768371
48,966.9991
4
-37,120.51
118,014.52
39,000.00
64,974.28
0.703765
45,726.6259
5
-38,605.33
121,554.95
39,000.00
66,248.76
0.644591
42,703.3569
6
-40,149.55
125,201.60
39,000.00
67,552.27
0.590393
39,882.3895
7
-41,755.53
128,957.65
39,000.00
68,885.31
0.540752
37,249.8717
Total = NPV =
50,133.81
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.