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After spending $9.000 on client-development, you have just been offered a big production contract by a new client. The contract will add $206,000 to your revenues for each of the next five years and it will cost you $105.000 per year to make the additional product. You will have to use some existing equipment and buy now equipment as well. The existing equipment is fully depreciated, but could be sold for $53,000 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 $31,000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager eams $76,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $35,000 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 21% and your discount rate is 15,2%. What is the NPV of the contract? (Note Assume that the equipment is put into use in year 1.)

After spending $9.000 on client-development, you have just been offered a big production contract by a new client. The contract will add $206,000 to your revenues for each of the next five years and it will cost you $105.000 per year to make the additional product. You will have to use some existing equipment and buy now equipment as well. The existing equipment is fully depreciated, but could be sold for $53,000 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 $31,000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager eams $76,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $35,000 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 21% and your discount rate is 15,2%. What is the NPV of the contract? (Note Assume that the equipment is put into use in year 1.)

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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After spending $9.000 on client-development, you have just been offered a big production contract by a new client. The contract will add $206,000 to your revenues for each of the next five years and it will cost you $105,000 per year to make the additional product. You will have to use some existing equipment and buy now equipment as well. The existing equipment is fully depreciated, but could be sold for $53,000 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 $31,000 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 $76,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $35,000 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 21% and your discount rate is 15,2%. 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) Year 0 Year 1 Year 2 206,000 105,000 Sales -Cost of Goods Sold Gross Prof -Annual Cost -Depreciation EBIT -Tax Incremental Eamings Depreciation - Incremental Working Capital -Opportunity Cost -Capital Investment Incremental Free Cash Flow $ Sales -Cost of Goods Sold Gross Profit Annual Cost $ $ $ 05 0 0 $ 0 0 9$ 0 0$ 0 200,000 $ 105,000 101,000 $ 35.000 0 $ S S Calculate the free cash flows below for years 3 through 6 Year 3 $206,000 105,000 Year 4 $206,000 s 105.000 S 101,000 $ 101,000 $ 35,000 35,000 S 101.000 35,000 g Year 5 200,000 $ 105,000 101.000 $ 35,000 Year 6 0
Transcribed Image Text:After spending $9.000 on client-development, you have just been offered a big production contract by a new client. The contract will add $206,000 to your revenues for each of the next five years and it will cost you $105,000 per year to make the additional product. You will have to use some existing equipment and buy now equipment as well. The existing equipment is fully depreciated, but could be sold for $53,000 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 $31,000 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 $76,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $35,000 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 21% and your discount rate is 15,2%. 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) Year 0 Year 1 Year 2 206,000 105,000 Sales -Cost of Goods Sold Gross Prof -Annual Cost -Depreciation EBIT -Tax Incremental Eamings Depreciation - Incremental Working Capital -Opportunity Cost -Capital Investment Incremental Free Cash Flow $ Sales -Cost of Goods Sold Gross Profit Annual Cost $ $ $ 05 0 0 $ 0 0 9$ 0 0$ 0 200,000 $ 105,000 101,000 $ 35.000 0 $ S S Calculate the free cash flows below for years 3 through 6 Year 3 $206,000 105,000 Year 4 $206,000 s 105.000 S 101,000 $ 101,000 $ 35,000 35,000 S 101.000 35,000 g Year 5 200,000 $ 105,000 101.000 $ 35,000 Year 6 0
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