O\'Bannon Electronics has an investment opportunity to produce a new HDTV. The r
ID: 2819033 • Letter: O
Question
O'Bannon Electronics has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $190 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the project. The firm is in the 34 percent tax bracket. The price of the product will be $535 per unit, in real terms, and will not change over the life of the project. Labor costs for Year 1 will be $15.85 per hour, in real terms, and will increase at 2 percent per year in real terms. Energy costs for Year 1 will be $4.20 per physical unit, in real terms, and will increase at 3 percent per year in real terms. The inflation rate is 5 percent per year. Revenues are received and costs are paid at year-end. Refer to the following table for the production schedule:
The real discount rate for the project is 4 percent.
Calculate the NPV of this project. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
O'Bannon Electronics has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $190 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the project. The firm is in the 34 percent tax bracket. The price of the product will be $535 per unit, in real terms, and will not change over the life of the project. Labor costs for Year 1 will be $15.85 per hour, in real terms, and will increase at 2 percent per year in real terms. Energy costs for Year 1 will be $4.20 per physical unit, in real terms, and will increase at 3 percent per year in real terms. The inflation rate is 5 percent per year. Revenues are received and costs are paid at year-end. Refer to the following table for the production schedule:
Explanation / Answer
Assume that the cash inflows and outflows are real cash flows, we will not have to adjust the same with inflation because the discount rate given is real discount rate.
Depreciation = 190 million/4 = 47.5 million
NPV = Cash Inflow - Cash Outflow
= $33,179,812
Particulars 0 1 2 3 4 Initial Investment (190000000) Revenue (units*unit proice) 82925000 88275000 98975000 93625000 Labour Cost (labour hours*hourly rate) (18386000) (20047080) (23086476) (22202136) Energy cost (Energy units*unit rate) (1050000) (1168020) (1292176) (1262099) Depreciation (47500000) (47500000) (47500000) (47500000) Cash flow before taxes (190000000) 15989000 19559900 27096348 22660765 Cash flow after taxes (66%) 10552740 12909534 17883589 14956105 Depreciation 47500000 47500000 47500000 47500000 Net Cash Flow (A) (190000000) 58052740 60409534 65383589 62456105 k = 4% (1/1.04^n) (B) 0 0.9615 0.9245 0.8890 0.8548 Net Cash Flow (A*B) (190000000) 55817709 55848614 58126011 53387478Related Questions
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