Question

1. Mercury Marine Corp is considering building an additional facility in the Appleton area – here are the facts – what is the net present value of this investment? Would you move forward with this project an make the investment?
   1. Initial investment of $2,000,000
   2. 10 year life with no salvage
   3. $600,000 additional marginal (differential) cash flows annually
   4. Annual expected property (fire, windstorm, etc) losses of $100,000
   5. Straight line depreciation
   6. 40% tax rate
   7. Minimum acceptable rate of return of 10%
   8. PV of $1 received at each of the next 10 years at 10% is 6.1446

Answer 1

first let us know the annual depreciation;

(initial investment - salvage value) / number of years

=>(2,000,000 -0) / 10 years

=>$200,000.

now,

after tax cash flows;

additional cash flows	600,000
less; depreciation	(200,000)
less; annual expenses	(100,000)
before tax income	300,000
less tax @40%	(120,000)
after tax income	180,000
add;depreciation	200,000
after tax cash flow	380,000

calculation of net present value;

present value of cash inflows ($380,000*6.1446)	2,334,948
less;present value of cash outflows	(2,000,000)
net present value	334,948

SInce net present value is positive, we can carry forward with the investment.