Question

After spending $10,300 on​ client-development, you have just been offered a big production contract by a new client. The contract will add $199,000 to your revenues for each of the next five years and it will cost you $96,000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully​ depreciated, but could be sold for $52,000 now. If you use it in the​ project, it will be worthless at the end of the project. You will buy new equipment valued at $32,000 and use the​ 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $77,000 per year. Since she is busy with ongoing​ projects, you are planning to hire an assistant at $38,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 to $30,000. It will return to $20,000 at the end of the project. Your​ company's tax rate is 35% and your discount rate is 14.1%.

What is the NPV of the​ contract?

Note​: Assume that the equipment is put into use in year 1.

Answer 1