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 + 62954.285711.06¹ + 64195.085711.06² + 65463.341711.06³ + 66759.486671.06⁴ + 68083.950911.06⁵ + 69437.161411.06⁶ + 70819.541041.06⁷

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