Question

"A manufacturing company has just received an order with the following financial data. All dollar values...

"A manufacturing company has just received an order with the following financial data. All dollar values are given in constant dollars, and inflation will impact the annual revenue, annual operating cost, and the salvage value. The two-year project requires immediately purchasing equipment for $56,000. The equipment falls into the MACRS 5-year class. The machine will be sold for $24,000 at the end of two years. The project will bring in additional annual revenue of $121,000, but it is expected to incur an additional annual operating cost of $48,000. The firm expects a general inflation rate of 6% per year during the project period. The firm's tax rate is 31%, and its market interest rate is 18%. What is the net present worth of this project?"

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Answer #1

Statement showing depreciation

Year Opening balance Depreciation rates Depreciation Closing balance
1 56000 20.00% 11200 44800
2 44800 32.00% 17920 26880
3 26880 19.20% 10752 16128
4 16128 11.52% 6451.2 9676.8
5 9676.8 11.52% 6451.2 3225.6
6 3225.6 5.76% 3225.6 0

Statement showing NPV

Particulars 0 1 2 NPV
Cost of equipment -56000
Additional revenue 128260 135955.6
annual operating cost 50880 50880
Depreciation 11200 17920
PBT 66180 67155.6
Tax @ 31% 20515.8 20818.24
PAT 45664.2 46337.36
Add: depreciation 11200 17920
Cash flow 56864.2 64257.36
Salvage value(24000*1.06^2)
26966.4 - 31%(26966.4-26880)		 26939.62
Total cash flow -56000 56864.2 91196.98
PVIF @ 18% 1 0.8475 0.7182
Present value -56000 48190 65496.25 57686.25
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