Question

Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $277,000. 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 $112,000, 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 $37,000, 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 34 percent. what is the NPV of the project? Do not round intermediate calculations and round your answer to 2 decimal places. Thank you

Answer #1

Operating cash flows = ( Revenues - expenses - depreciation) x ( 1- tax rate) + depreciation

The NPV of the project = - $ 277,000 + 62954.285711.06^{1}
+ 64195.085711.06^{2}
+ 65463.341711.06^{3}
+ 66759.486671.06^{4}
+ 68083.950911.06^{5}
+ 69437.161411.06^{6}
+ 70819.541041.06^{7}

**The NPV of the project = $94,294.07**

Year | Cash outflows | Cash inflows | Depreciation per year | Operating cash flows |

0 | $277,000 | $0 | ||

1 | $37,000 | $112,000 | 39571.42857 | 62954.28571 |

2 | $38,480.00 | $115,360.00 | 39571.42857 | 64195.08571 |

3 | $40,019.20 | $118,820.80 | 39571.42857 | 65463.34171 |

4 | $41,619.97 | $122,385.42 | 39571.42857 | 66759.48667 |

5 | $43,284.77 | $126,056.99 | 39571.42857 | 68083.95091 |

6 | $45,016.16 | $129,838.70 | 39571.42857 | 69437.16141 |

7 | $46,816.80 | $133,733.86 | 39571.42857 | 70819.54104 |

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