Question

After spending $10.100 on client-development you have just been offered a big production contract by a new clent The contract will add $191,000 to your revenues for each of the next five years and it will cost you $95,000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as wel. 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 $27,000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project Your curent production manager earns $79,000 per year Since she is busy with ongoing projects, you are planning to hire an assistant at $45,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 1o $30.000. It will retum to s20000 at the end of the project Your company's tax rate is 35% and your discount rate is 15.7. 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 (Round to the nearest dolar.) Year 0 Sales -Cost of Goods Sold Gross Profit Annual Cost -Depreciation $ EBIT -Tax Incremental Earnings $ +Depreciation -Incremental Working Capital Opportunity Cost Capital Inwestment Incremental Free Cash Flow

7 parts reminaing must do all the way until year 6
thank you

an example of what its supposed to look like

Answer 1

Font Alignment Number 6 0 1556 -1556 D E F NSWER PARTICULAR\YEARS 1 2 3 4 5 SALES 191000 191000 191000 191000 191000 COST OF GOODS SOLD 95000 95000 95000 95000 95000 GROSS PROFIT 96000 96000 96000 96000 96000 - ANNUAL COST 45000 45000 45000 45000 45000 - DEPRECIATION 5400 8640 5184 3110 3110 EBIT $ 0 45600 42360 45816 4789047890 TAX 15960 14826 16035.6 16761.5 16761.5 INCREMENTAL EARNINGS $ 0 29640 2 7534 29780.4 31128.5 31128.5 + DEPRECIATION $ 0 5400 8640 5184 3110 3110 CASH FLOW 35040 36174 34964.4 34238.5 34238.5 INITIAL INVETMENT $ 27000 WORKING CAPITAL $ - 10000 20000 SALVAGE VALUE AFTER TAX 53000*65/100 $ 34450 NET CASH FLOW $ -37000 69490 36174 34964.4 34238.5 54238.5 PVF @15.796 $ 1 0.8643 0.7470.6457 0.558 0.4831 PY OF THE PROJECT $ 37000 60060.21 27021.98 22576.51 19105.08 26202.62 NPV OF THE PROJECT $ 117966.4 THE PROJECT HAS POSITIVE NPV. THEREFORE PROJECT IS FEASIBLE - 1556 1556 $ -10000 -NCREMENTAL WORKING CAPITAL - OPPORTUNITY COST CAPTALINVESTMENT FREE CASH FLOW $ -27000 S-37000 69490 36174 349644 34238.5 54236.5