Question

Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $280,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $115,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 2 percent. Production costs at the end of the first year will be $40,000, in nominal terms, and they are expected to increase at 3 percent per year. The real discount rate is 5 percent. The corporate tax rate is 40 percent.
   
Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
NPV           $____________________

Answer 1

Sales	115,000	117300	119646	112039	124480	126970	129509
COGS	40000	41200	42436	43709	45020	46371	47762
Depreciation	40000	40000	40000	40000	40000	40000	40000
Taxable Income	35000	36100	37210	28330	39460	40599	41747
PAT(after 40% tax)	21000	21660	22326	16998	23676	24359	25048
Add back Depreciation	61000	61660	62326	56998	63676	64359	65048

Initial Investment = $280,000

Discount Rate = 5%

$NPV = -Initial Investment + \sum_{t=1}^{t} C_{t}/(1+r)^t$

NPV = $78,900.50