Sanders Enterprises Inc has been considering the purchase of

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $288,000. 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 $123,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 4 percent. Production costs at the end of the first year will be $48,000, in nominal terms, and they are expected to increase at 5 percent per year. The real discount rate is 7 percent. The corporate tax rate is 40 percent. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Solution

Year

Cash outflows

Cash inflows

Depreciation = D = 288000/7 = 41142.86

Net cash flow = (CF-D)x(1-Tax rate)+D+WC

Discount factor = Df = 1/(1+11.28%)^Year

Present Values

Co

Ci

D

(Co+Ci-D)x(1-40% rate)+D

Df

Df x Net Cash flows

0

-288,000.00

0.00

0.00

-288,000.00

1.000000

-288,000.00

1

-48,000.00

123,000.00

41,142.86

61,457.14

0.898634

55,227.48

2

-50,400.00

127,920.00

41,142.86

62,969.14

0.807543

50,850.30

3

-52,920.00

133,036.80

41,142.86

64,527.22

0.725686

46,826.49

4

-55,566.00

138,358.27

41,142.86

66,132.51

0.652126

43,126.73

5

-58,344.30

143,892.60

41,142.86

67,786.12

0.586023

39,724.21

6

-61,261.52

149,648.31

41,142.86

69,489.22

0.526620

36,594.41

7

-64,324.59

155,634.24

41,142.86

71,242.93

0.473239

33,714.91

Total = NPV =

18,064.53

Dicounting factor = 1.07 x 1.04 - 1 = 11.28%

Net Present Value = NPV = 18,064.53

Note: *Year 0 , Net cash flow formula doesn’t applies since cash flows are in negative hence no tax application.

Year	Cash outflows	Cash inflows	Depreciation = D = 288000/7 = 41142.86	Net cash flow = (CF-D)x(1-Tax rate)+D+WC	Discount factor = Df = 1/(1+11.28%)^Year	Present Values
	Co	Ci	D	(Co+Ci-D)x(1-40% rate)+D	Df	Df x Net Cash flows
0	-288,000.00	0.00	0.00	-288,000.00	1.000000	-288,000.00
1	-48,000.00	123,000.00	41,142.86	61,457.14	0.898634	55,227.48
2	-50,400.00	127,920.00	41,142.86	62,969.14	0.807543	50,850.30
3	-52,920.00	133,036.80	41,142.86	64,527.22	0.725686	46,826.49
4	-55,566.00	138,358.27	41,142.86	66,132.51	0.652126	43,126.73
5	-58,344.30	143,892.60	41,142.86	67,786.12	0.586023	39,724.21
6	-61,261.52	149,648.31	41,142.86	69,489.22	0.526620	36,594.41
7	-64,324.59	155,634.24	41,142.86	71,242.93	0.473239	33,714.91
					Total = NPV =	18,064.53