Question

NPV.??Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS? system: annual sales of 44 comma 00044,000 units at ?$1616 a? unit, production costs at 3939?% of sales? price, annual fixed costs for production at $ 210 comma 000$210,000. The company tax rate is 3030?%. What is the annual operating cash flow of the new GPS? system? Should Grady Precision Measurement Tools add the GPS system to its set of? products? The initial investment is ?$1 comma 340 comma 0001,340,000 for manufacturing? equipment, which will be depreciated over six years? (straight line) and will be sold at the end of five years for $ 380 comma 000$380,000. The cost of capital is 1111?%. What is the annual operating cash flow of the new GPS? system?

Answer 1

Particular	Amount
No of units to be sold	44000
Sales price	16
Variable cost(39%of 16)	6.24
Contribution per unit	9.76
Total contribution	429440
Less fixed cost	210000
Profit before tax and depreciation	219440
Less Depreciation	160000

Profit before tax	59440
Less tax 30%of 59440	17832
Profit after tax	41608
Add depreciation	160000
Annual cash inflow	201608

Calculation of depreciation

Cost of assets=1340000 salvage value=380000 life =6years

Depreciation=(1340000-380000)/6=160000

Calculation of NPV

NPV=PV of annual inflow +present value of terminal inflow - initial outflow

=201608PVAF(11%,6years )+380000PVIF(11%,6 years) - 1340000

=201608*4.2305+380000*0.5346-1340000

=853215+203148-1340000=-283637NEGATIVE

SHOULD NOT BE ADDED AS IT HAS NEGATIVE NPV