Question

# Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for \$277,000. The...

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

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