Question

Project Analysis and Inflation Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $1.2 million, and its economic life is five years. The machine will be fully depreciated by the straight- line method. The machine will produce 25,000 keyboards each year. The price of each keyboard will be $47 in the first year and will increase by 3 percent per year. The production cost per keyboard will be $17 in the first year and will increase by 4 percent per year. The project will have an annual fixed cost of $235,000 and require an immedi- ate investment of $200,000 in net working capital. The corporate tax rate for the com- pany is 21 percent. If the appropriate discount rate is 11 percent, what is the NPV of the investment?

Answer 1

solution 0 1 2 3 4 5 sale price per unit Less Production cost per unit contribution margin per unit x units sold 49.86230 47.00000 48.41000 51.35817 52.89891 17.00000 17.68000 18.38720 19.12269 19.88760 30.00000 30.73000 31.47510 32.23548 33.01132 25,000 25,000 25,000 25,000 25,000 Total contribution margin Less fixed cost 750,000.00 768,250.00 -235,000.00 235,000.00 -235,000.00 -235,000.00-235,000.00 -240,000.00 - 240,000.00 - 240,000.00 -240,000.00-240,000.00 275,000.00 293,250.00 311,877.50 786,877.50 805,887.03 825,282.96 Less Depreciation (1200000/5) Income before tax 330,887.03 350,282.96 61,582.50 65,494.28 Less : tax at 21% 57,750.00 73,559.42 69,486.28 Net income Add Depreciation 261,400.75 276,723.54 240,000.00 240,000.00 240,000.00 240,000.00 240,000.00 457,250.00 471,667.50 486,383.23501,400.75 516,723.54 231,667.50 246,383.23 217,250.00 OCF -1,200,000.00 cost of machine Changes in net working capital 200,000.00 200,000.00 -1,400,000.00 457,250.00471,667.50 501,400.75 716,723.54 net cash flow 486,383.23 x discount factor at 11% 1.00000 0.90090 0.81162 0.73119 0.65873 0.59345 Present value NPV -1,400,000.00411,936.94 330,288.20 425,340.54 355,639.22 382,815.92 506,020.82