Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $550,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to be $415,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 3 percent. Production costs at the end of the first year will be $260,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 6 percent. The corporate tax rate is 21 percent. Calculate the NPV of the project.
| USD | |||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | Total NPV of project |
| Investment | $ (550,000.00) | ||||||||
| Operating Revenues | $ 415,000.00 | $ 427,450.00 | $ 440,273.50 | $ 453,481.71 | $ 467,086.16 | $ 481,098.74 | $ 495,531.70 | ||
| Less: Production Cost | (260,000.00) | (270,400.00) | (281,216.00) | (292,464.64) | (304,163.23) | (316,329.75) | (328,982.94) | ||
| Less: Depreciation | (78,571.43) | (78,571.43) | (78,571.43) | (78,571.43) | (78,571.43) | (78,571.43) | (78,571.43) | ||
| Profit before tax | 76,428.57 | 78,478.57 | 80,486.07 | 82,445.64 | 84,351.50 | 86,197.56 | 87,977.33 | ||
| Tax @ 21% | (16,050.00) | (16,480.50) | (16,902.08) | (17,313.58) | (17,713.82) | (18,101.49) | (18,475.24) | ||
| PAT | 60,378.57 | 61,998.07 | 63,584.00 | 65,132.05 | 66,637.69 | 68,096.07 | 69,502.09 | ||
| Add: Depreciation | 78,571.43 | 78,571.43 | 78,571.43 | 78,571.43 | 78,571.43 | 78,571.43 | 78,571.43 | ||
| Cash Flow | (550,000.00) | 138,950.00 | 140,569.50 | 142,155.43 | 143,703.48 | 145,209.12 | 146,667.50 | 148,073.52 | |
| Discount Factor @ 6% | 1.00 | 0.94 | 0.89 | 0.84 | 0.79 | 0.75 | 0.70 | 0.67 | |
| Present Value of cash flows | (550,000.00) | 131,084.91 | 125,106.35 | 119,356.44 | 113,826.62 | 108,508.70 | 103,394.80 | 98,477.35 | $ 249,755.16 |
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