Question

After spending $10,300 on chient development, you have just been offered a big production contract by a new client The contract will add $206,000 to your revenues for each of the next five years and it will cost you $98 to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully depreciated but could be sold for $51.000 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 $29 000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $82,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $37.000 per year to help with the expansion. You will have to immediately increase your inventory from $20.000 to $30,000. It will return to $20,000 at the end of the project. Your company's tax rate is 35% and your discount rate is 14.6%. What is the NPV of the contract? Note Assume that the equipment is put into use in year 1 30 Calculate the free cash flows below. (Round to the nearest dollar) 1/1 1:0 Sales Cost of Goods Sold Gross Profit - Annual Cost Depreciation EBIT his erme Tax Enter any number in the edit fields and then continue to the next question.

calculate for all 6 years and NPV. PLEASE HELP QUICK

Answer 1

Calculation of income tax		Year 1	Year 2	Year 3	Year 4	Year5
Sales		206,000	206,000	206,000	206,000	206,000
COGS		(98,000)	(98,000)	(98,000)	(98,000)	(98,000)
GP	Sales - COGS	108,000	108,000	108,000	108,000	108,000
Annual cost		(37,000)	(37,000)	(37,000)	(37,000)	(37,000)
Depreciation		(5,800)	(5,800)	(5,800)	(5,800)	(5,800)
Net profit		65,200	65,200	65,200	65,200	65,200
Tax	Net profit X 35%	22,820	22,820	22,820	22,820	22,820

Calculation of net cash flows
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Client development	(10,300)
Opportunity cost for old assets	(51,000)
New equipment	(29,000)
Sales		206,000	206,000	206,000	206,000	206,000
COGS		(98,000)	(98,000)	(98,000)	(98,000)	(98,000)
Assistant salary		(37,000)	(37,000)	(37,000)	(37,000)	(37,000)
Tax (As calculated above)	-	(22,820)	(22,820)	(22,820)	(22,820)	(22,820)
Free cash flows	(90,300)	48,180	48,180	48,180	48,180	48,180

Calculation of NPV
Year	Cash flow	PV Factor @ 14.6%	Discounted cash flows
0	(90,300)	1	(90,300)
1	48,180	0.87	42,042
2	48,180	0.76	36,686
3	48,180	0.66	32,012
4	48,180	0.58	27,934
5	48,180	0.51	24,375
NPV			72,748