Problem 9-30 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 5 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 byou use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $30,000, put it into use in year 1, land 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 21% and your discount rate is 15%. What is the NPV of the contract? Depreciation MACRS Schedule Depreciation NPV Change in NWC Net Working Capital Change in NWC Cash Flow Year 0 2 3 5 20.00% 32.00% 6,000 9,600 19.20% 5,760 11.52% 11.52% 5.76 3,456 3,456 1,72 0 1 2 3 4 5 Year Without Project 20,000 30,000 30,000 30,000 30,000 30,000 20,000 10,000 0 0 0 0 -10,000 -10,000 0 0 0 0 10,000 Year 0 2 5 Revenues XXXXXXX 200,000 200,000 200,000 200,000 200,000 Costs XXXXXXX -100,000 -100,000 -100,000 -100,000 -100,000 XXXXXXX -40,000 -40,000 -40,000 -40,000 -40,000 Salary Depreciation XXXXXXX -6,000 -9,600 -5,760 -3,456 -3,456 -1,72 Tax Taxable Income Net Income XXXXXXX 54,000 50,400 54,240 56,544 56,544 -1,7 21% XXXXXXX -11,340 -10,584 -11,390 -11,874 -11,874 36 XXXXXXX 42,660 39,816 42,850 44,670 44,670 -1,3 Add back Depreciation XXXXXXX 6,000 9,600 5,760 3,456 3,456 1,7 CapEx -30,000 XXXXXXX Opportunity Cost CF from Change NWC FCF -39,500 XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX -10.000 0 0 0 0 10,000 NPV 0.00
Problem 9-30 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 5 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 byou use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $30,000, put it into use in year 1, land 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 21% and your discount rate is 15%. What is the NPV of the contract? Depreciation MACRS Schedule Depreciation NPV Change in NWC Net Working Capital Change in NWC Cash Flow Year 0 2 3 5 20.00% 32.00% 6,000 9,600 19.20% 5,760 11.52% 11.52% 5.76 3,456 3,456 1,72 0 1 2 3 4 5 Year Without Project 20,000 30,000 30,000 30,000 30,000 30,000 20,000 10,000 0 0 0 0 -10,000 -10,000 0 0 0 0 10,000 Year 0 2 5 Revenues XXXXXXX 200,000 200,000 200,000 200,000 200,000 Costs XXXXXXX -100,000 -100,000 -100,000 -100,000 -100,000 XXXXXXX -40,000 -40,000 -40,000 -40,000 -40,000 Salary Depreciation XXXXXXX -6,000 -9,600 -5,760 -3,456 -3,456 -1,72 Tax Taxable Income Net Income XXXXXXX 54,000 50,400 54,240 56,544 56,544 -1,7 21% XXXXXXX -11,340 -10,584 -11,390 -11,874 -11,874 36 XXXXXXX 42,660 39,816 42,850 44,670 44,670 -1,3 Add back Depreciation XXXXXXX 6,000 9,600 5,760 3,456 3,456 1,7 CapEx -30,000 XXXXXXX Opportunity Cost CF from Change NWC FCF -39,500 XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX -10.000 0 0 0 0 10,000 NPV 0.00
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:Problem 9-30
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 5 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
byou use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $30,000, put it into use in year 1,
land 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 21% and your discount rate is 15%. What is the NPV of the contract?
Depreciation
MACRS Schedule
Depreciation
NPV
Change in NWC
Net Working Capital
Change in NWC
Cash Flow
Year
0
2
3
5
20.00%
32.00%
6,000
9,600
19.20%
5,760
11.52%
11.52%
5.76
3,456
3,456
1,72
0
1
2
3
4
5
Year
Without Project
20,000
30,000
30,000
30,000
30,000
30,000
20,000
10,000
0
0
0
0
-10,000
-10,000
0
0
0
0
10,000
Year
0
2
5
Revenues
XXXXXXX
200,000
200,000
200,000
200,000
200,000
Costs
XXXXXXX
-100,000
-100,000
-100,000
-100,000
-100,000
XXXXXXX
-40,000
-40,000
-40,000
-40,000
-40,000
Salary
Depreciation
XXXXXXX
-6,000
-9,600
-5,760
-3,456
-3,456
-1,72
Tax
Taxable Income
Net Income
XXXXXXX
54,000
50,400
54,240
56,544
56,544
-1,7
21%
XXXXXXX
-11,340
-10,584
-11,390
-11,874
-11,874
36
XXXXXXX
42,660
39,816
42,850
44,670
44,670
-1,3
Add back Depreciation
XXXXXXX
6,000
9,600
5,760
3,456
3,456
1,7
CapEx
-30,000 XXXXXXX
Opportunity Cost
CF from Change NWC
FCF
-39,500 XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX XXXXXXX XXXXXXX
XXXXXXX XXXXXXX XXXXXXX XXXXXXX
XXXXXXX
-10.000
0
0
0
0
10,000
NPV
0.00
AI-Generated Solution
AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.
Unlock instant AI solutions
Tap the button
to generate a solution
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