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.)

FYI $78,900.50 IS NOT THE ANSWER!!!

Answer 1

calculations

straight line depreciation = (cost of the facility- salvage value)/life of the facility

=(280,000-0)/7= $40,000

year	1	2	3	4	5	6	7
revenue inflows	115,000	117,300	119,646	122,039	124,480	126,970	129,510
revenue outflows(-)	40,000	41,200	42,436	43,710	45,021	46,371	47,762
net cash flows	75,000	76,100	77,210	78,329	79,459	80,599	81,748
depreciation(-)	40,000	40,000	40,000	40,000	40,000	40,000	40,000
income before taxes	35,000	36,100	37,210	38,329	39,459	40,599	41,748
Taxes@40% (-)	14,000	14,440	14,884	15,331	15,783	16,239	16,699
after-tax income	21,000	21,660	22,326	22,998	23,676	24,360	25,049
depreciation (+)	40,000	40,000	40,000	40,000	40,000	40,000	40,000
after-tax cash flows	61,000	61,660	62,326	62,998	63,676	64,360	65,049
after-tax sal. value	0	0	0	0	0	0	0
after tax net cash flow	61,000	61,660	62,326	62,998	63,676	64,360	65,049
discount rate @ 5%(*)	0.952	0.907	0.864	0.823	0.784	0.746	0.711
PV of cash flows	58,072	55,925.62	53,849.66	51,847.35	49,924.33	48,012.56	46,249.83
total NPV							363,881.35

after tax salvage value= cash proceeds - tax on gain or loss

tax on gain or loss= (cash proceeds - book value)* tax rate

OR after tax salvage value= cash proceeds -(cash proceeds- book value)* tax rate

after tax salvage value is zero as according to question there is no resale value after 7 years

# note discount rate =(1+r)^-n where r is rate of discounting and n is no. of period

= (1+0.05)^-1= 0.952

=(1+0.05)^-2=0.907

so on