After spending $ 9 comma 100 on client - development, you have just been offered a big production contract by a new client. The contract will add $ 199 comma 000 to your revenues for each of the next five years and it will cost you $ 104 comma 000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully depreciated, but could be sold for $ 53 comma 000 now. If you use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $ 27 comma 000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $ 79 comma 000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $ 42 comma 000 per year to help with the expansion. You will have to immediately increase your inventory from $ 20 comma 000 to $ 30 comma 000. It will return to $ 20 comma 000 at the end of the project. Your company's tax rate is 21% and your discount rate is 14.7 %. What is the NPV of the contract? (Note: Assume that the equipment is put into use in year 1.) Calculate the free cash flows below for years 0 through 2: (Round to the nearest dollar.)Calculate the free cash flows below for years 3 through 6:
After spending $ 9 comma 100 on client - development, you have just been offered a big production contract by a new client. The contract will add $ 199 comma 000 to your revenues for each of the next five years and it will cost you $ 104 comma 000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully depreciated, but could be sold for $ 53 comma 000 now. If you use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $ 27 comma 000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $ 79 comma 000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $ 42 comma 000 per year to help with the expansion. You will have to immediately increase your inventory from $ 20 comma 000 to $ 30 comma 000. It will return to $ 20 comma 000 at the end of the project. Your company's tax rate is 21% and your discount rate is 14.7 %. What is the NPV of the contract? (Note: Assume that the equipment is put into use in year 1.) Calculate the free cash flows below for years 0 through 2: (Round to the nearest dollar.)Calculate the free cash flows below for years 3 through 6:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:After spending $ 9 comma 100 on client - development,
you have just been offered a big production contract by
a new client. The contract will add $199 comma 000 to
your revenues for each of the next five years and it will
cost you $ 104 comma 000 per year to make the
additional product. You will have to use some existing
equipment and buy new equipment as well. The
existing equipment is fully depreciated, but could be
sold for $ 53 comma 000 now. If you use it in the
project, it will be worthless at the end of the project. You
will buy new equipment valued at $ 27 comma 000 and
use the 5-year MACRS schedule to depreciate it. It will
be worthless at the end of the project. Your current
production manager earns $ 79 comma 000 per year.
Since she is busy with ongoing projects, you are
planning to hire an assistant at $ 42 comma 000 per
year to help with the expansion. You will have to
immediately increase your inventory from $ 20 comma
000 to $ 30 comma 000. It will return to $ 20 comma
000 at the end of the project. Your company's tax rate is
21 % and your discount rate is 14.7 %. What is the NPV
of the contract? (Note: Assume that the equipment is
put into use in year 1.) Calculate the free cash flows
below for years 0 through 2: (Round to the nearest
dollar.)Calculate the free cash flows below for years 3
through 6:
Calculate the free cash flows below for years 3 through 6:
Sales
- Cost of Goods Sold
Gross Profit
-Annual Cost
-Depreciation
EBIT
-Tax
Incremental Eamings
+ Depreciation
-Incremental Working Capital
- Opportunity Cost
-Capital Investment
Year 3
Year 4
Year 5
Year 6
$
$
$
$
Incremental Free Cash Flow
The NPV of the project is $ (Round to the nearest dollar.)
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