Sanders Enterprises, Inc., has been considering the purchase of a new manufactur
ID: 2817364 • Letter: S
Question
Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $284,000. 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 $119,000, 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 $44,000, 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 40 percent.
Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $284,000. 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 $119,000, 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 $44,000, 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 40 percent.
Explanation / Answer
Now NPV = Present Value of all cash flows - initial investment = 57222.96 + 54821.01 + 52527.80 + 50337.78 + 48245.71 + 46246.65 + 44335.94) - 284000 = + $69737.85
PARTICULARS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 Sales 119000.00 123760.00 128710.40 133858.82 139213.17 144781.70 150572.96 Less: Variable Costs 44000.00 46200.00 48510.00 50935.50 53482.28 56156.39 58964.21 Less: Depreciation 40571.43 40571.43 40571.43 40571.43 40571.43 40571.43 40571.43 Profit before tax 34428.57 36988.57 39628.97 42351.89 45159.47 48053.88 51037.33 Less: Tax @ 40% 13771.43 14795.43 15851.59 16940.75 18063.79 19221.55 20414.93 Net Income 20657.14 22193.14 23777.38 25411.13 27095.68 28832.33 30622.40 Add: Depreciation 40571.43 40571.43 40571.43 40571.43 40571.43 40571.43 40571.43 OCF 61228.57 62764.57 64348.81 65982.56 67667.11 69403.76 71193.82 PVF @ 7% 0.934579439 0.873438728 0.816297877 0.762895212 0.712986 0.6663422 0.622749742 PV 57222.96 54821.01 52527.80 50337.78 48245.71 46246.65 44335.94Related Questions
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