Sanders Enterprises, Inc., has been considering the purchase of a new manufactur
ID: 2825501 • Letter: S
Question
Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $288,000. 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 $123,000, 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 $48,000, 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. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Year
Cash outflows
Cash inflows
Depreciation = D = 288000/7 = 41142.86
Net cash flow = (CF-D)x(1-Tax rate)+D+WC
Discount factor = Df = 1/(1+11.28%)^Year
Present Values
Co
Ci
D
(Co+Ci-D)x(1-40% rate)+D
Df
Df x Net Cash flows
0
-288,000.00
0.00
0.00
-288,000.00
1.000000
-288,000.00
1
-48,000.00
123,000.00
41,142.86
61,457.14
0.898634
55,227.48
2
-50,400.00
127,920.00
41,142.86
62,969.14
0.807543
50,850.30
3
-52,920.00
133,036.80
41,142.86
64,527.22
0.725686
46,826.49
4
-55,566.00
138,358.27
41,142.86
66,132.51
0.652126
43,126.73
5
-58,344.30
143,892.60
41,142.86
67,786.12
0.586023
39,724.21
6
-61,261.52
149,648.31
41,142.86
69,489.22
0.526620
36,594.41
7
-64,324.59
155,634.24
41,142.86
71,242.93
0.473239
33,714.91
Total = NPV =
18,064.53
Dicounting factor = 1.07 x 1.04 - 1 = 11.28%
Net Present Value = NPV = 18,064.53
Note: *Year 0 , Net cash flow formula doesn’t applies since cash flows are in negative hence no tax application.
Year
Cash outflows
Cash inflows
Depreciation = D = 288000/7 = 41142.86
Net cash flow = (CF-D)x(1-Tax rate)+D+WC
Discount factor = Df = 1/(1+11.28%)^Year
Present Values
Co
Ci
D
(Co+Ci-D)x(1-40% rate)+D
Df
Df x Net Cash flows
0
-288,000.00
0.00
0.00
-288,000.00
1.000000
-288,000.00
1
-48,000.00
123,000.00
41,142.86
61,457.14
0.898634
55,227.48
2
-50,400.00
127,920.00
41,142.86
62,969.14
0.807543
50,850.30
3
-52,920.00
133,036.80
41,142.86
64,527.22
0.725686
46,826.49
4
-55,566.00
138,358.27
41,142.86
66,132.51
0.652126
43,126.73
5
-58,344.30
143,892.60
41,142.86
67,786.12
0.586023
39,724.21
6
-61,261.52
149,648.31
41,142.86
69,489.22
0.526620
36,594.41
7
-64,324.59
155,634.24
41,142.86
71,242.93
0.473239
33,714.91
Total = NPV =
18,064.53
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.