After spending $10,000 on client-development, you have just been offered a big production contract by a new client. The contract will add $200,000 to your revenues for each of the next five years and it will cost you $100,000 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 $50,000 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 $30,000 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 $80,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $40,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 to $30,000. It will return to $20,000 at the end of the project. Your company's tax rate is 35% and your discount rate is 15%. What is the NPV of the contract? Note: Assume that the equipment is put into use in year 1. Calculate the free cash flows below: (Round to the nearest dollar.) Year 0 Year 1 Year 2 Sales 2$ $ $ -Cost of Goods Sold 2$ 2$ $ Gross Profit 2$ $ - Annual Cost 2$ 2$ $ - Depreciation $ $ EBIT $1 Тах 24 $ Incremental Earnings $ $ + Depreciation $ $ Incremental Working Capital $ $ - Opportunity Cost 2$ $ $| Capital Investment $ Incremental Free Cash Flow 2$ $4
After spending $10,000 on client-development, you have just been offered a big production contract by a new client. The contract will add $200,000 to your revenues for each of the next five years and it will cost you $100,000 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 $50,000 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 $30,000 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 $80,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $40,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 to $30,000. It will return to $20,000 at the end of the project. Your company's tax rate is 35% and your discount rate is 15%. What is the NPV of the contract? Note: Assume that the equipment is put into use in year 1. Calculate the free cash flows below: (Round to the nearest dollar.) Year 0 Year 1 Year 2 Sales 2$ $ $ -Cost of Goods Sold 2$ 2$ $ Gross Profit 2$ $ - Annual Cost 2$ 2$ $ - Depreciation $ $ EBIT $1 Тах 24 $ Incremental Earnings $ $ + Depreciation $ $ Incremental Working Capital $ $ - Opportunity Cost 2$ $ $| Capital Investment $ Incremental Free Cash Flow 2$ $4
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
Related questions
Question
Transcribed Image Text:After spending $10,000 on client-development, you have just been offered a big production contract by a new client. The contract will add $200,000 to your revenues for each of the next five years and it will cost you $100,000 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 $50,000 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 $30,000 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 $80,000 per year. Since she is busy with ongoing
projects, you are planning to hire an assistant at $40,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 to $30,000. It will return to $20,000 at the end of the project. Your company's tax
rate is 35% and your discount rate is 15%. 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: (Round to the nearest dollar.)
Year 0
Year 1
Year 2
Sales
$
Cost of Goods Sold
2$
$
$
Gross Profit
$
- Annual Cost
- Depreciation
2$
EBIT
- Tax
$
Incremental Earnings
$
$
+ Depreciation
- Incremental Working Capital
- Opportunity Cost
- Capital Investment
2$
Incremental Free Cash Flow
2$
Year 3
Year 4
Year 5
Year 6
%24
%24
24
%24
%24
24
%24
%24
24
24
%24
%24
24
%24
%24
%24
%24
%24
Transcribed Image Text:Year 3
Year 4
Year 5
Year 6
Sales
$
$
- Cost of Goods Sold
Gross Profit
$
- Annual Cost
$
$
- Depreciation
$
$
ЕBIT
2$
$
- Тах
2$
$
Incremental Earnings
2$
2$
+ Depreciation
$
- Incremental Working Capital
$
- Opportunity Cost
$
Capital Investment
$
Incremental Free Cash Flow
The NPV of the project is $
(Round to the nearest dollar.)
%24
24
%24
%24
%24
%24
%24
%24
%24
%24
24
%24
%24
%24
%24
%24
%24
%24
%24
%24
%24
%24
%24
%24
%24
24
%24
%24
%24
%24
%24
%24
%24
%24
%24
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 5 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education