Mustang Enterprises Inc has been considering the purchase of

Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $283,000. 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 $118,000, 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 $43,000, 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 34 percent. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Solution

Year 0 1 2 3 4 5 6 7 Initial Investment      2,83,000.00 Revenues 1,18,000.00    1,22,720.00 1,27,628.80 1,32,733.95 1,38,043.31 1,43,565.04 1,49,307.64 Less:- Production Cost     43,000.00        45,150.00     45,150.00     45,150.00     45,150.00     45,150.00     45,150.00 EBIT     75,000.00        77,570.00     82,478.80     87,583.95     92,893.31     98,415.04 1,04,157.64 Less:- Dep     40,428.57        40,428.57     40,428.57     40,428.57     40,428.57     40,428.57     40,428.57 Earnings after Dep     34,571.43        37,141.43     42,050.23     47,155.38     52,464.74     57,986.47     63,729.07 Taxes @34%     11,754.29        12,628.09     14,297.08     16,032.83     17,838.01     19,715.40     21,667.88 Earnings after tax and dep     22,817.14        24,513.34     27,753.15     31,122.55     34,626.73     38,271.07     42,061.19 Add:- Dep     40,428.57        40,428.57     40,428.57     40,428.57     40,428.57     40,428.57     40,428.57 Cash Flow after Tax before dep     63,245.71        64,941.91     68,181.72     71,551.12     75,055.30     78,699.64     82,489.76 TOTAL FREE CF     -2,83,000.00     63,245.71        64,941.91     68,181.72     71,551.12     75,055.30     78,699.64     82,489.76 PVF @ 7% 1.000 0.935 0.873 0.816 0.763 0.713 0.666 0.623 Present Value -2,83,000.000 59,108.144     56,722.783 55,656.595 54,586.009 53,513.391 52,440.895 51,370.476 NPV 1,00,398.293$