Question

A toy manufacturer has two options to acquire electronic component for existing products. Option one: pay a sub-contractor $600,000 (before tax) a year. Option two: produce the component by itself. Assume the production will last for four years. If the tax rate is 35% and the cost of capital is 15%. Assume all operating cash flows occur at the end of the year.

                                                                       

Calculate the NPV for Option one? 4years

Answer 1

Answer.

Option one: pay a sub-contractor $600,000 (before tax) a year.

tax rate is 35%

cost of capital is 15%.

Assume all operating cash flows occur at the end of the year.

Calculate the NPV for Option one?

Here the $ 600000 is paid at the end of 1st year

Fiest calculate the cash flow=

Cost = - 600000

- tax benefits = 600000* 35% = 210000

= Net cash flow = - 390000

Year	1
Cost	-- 600000
- tax benefit @35%	210000
= Net cash flow	--390000
PV of $1 factor @ 15% discount rate	( 1 / 1 +15%)1 = 0.869
PV of cash flow	--- 339130

NPV = PV of cash flow

NPV =   -- $ 339130