Question

Kopperud Electronics has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $195 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the project. The firm has a 21 percent tax rate. The price of the product will be $543 per unit, in real terms, and will not change over the life of the project. Labor costs for Year 1 will be $16.50 per hour, in real terms, and will increase at 3 percent per year in real terms. Energy costs for Year 1 will be $4.74 per physical unit, in real terms, and will increase at 2 percent per year in real terms. The inflation rate is 4 percent per year. Revenues are received and costs are paid at year-end. Refer to the following table for the production schedule:

  

	Year 1		Year 2		Year 3		Year 4
Physical production, in units	177,000		197,000		212,000		171,000
Labor input, in hours	1,280,000		1,520,000		1,376,000		1,296,000
Energy input, physical units	226,000		241,000		271,000		256,000
The real discount rate for the project is 6 percent.

  

Calculate the NPV of this project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) NPV?

Answer 1

В C D E F G Year 0 1 1770001 197000 212000 171000 1280000 1520000 1376000 1296000 226000 241000 271000 256000 Physical production, in units Labor input, in hours Energy input, physical units Investment Sales Labor Cost Energy Costs Depreciation EBT Tax (21%) Net Income Cash Flows PV Factor @6% Present value NPV -195000000 96111000 106971000 115116000/ 92853000| 21120000 25832400 24086674| 23366874| 1071240 116518713364351287712 48750000 48750000| 48750000| 48750000| 25169760 31223413 40942891 19448414 5285650 6556917 8598007 4084167 198841101 24666496 323448841 15364247 -195000000 68634110 73416496 81094884 64114247 0.9434 0.8900 0.8396 0.7921 -195000000 64749160.8 65340420.5| 68088828.3 50784488.6 53962898.04 NPV = $53,962,898.04 20

Excel formula:

D E F G Year 1 2 3 4 Physical production, in units 177000 197000 212000 171000 Labor input, in hours 1280000 1520000 1376000 1296000 Energy input, physical units 226000 241000 271000 256000 -195000000 Investment Sales Labor Cost Energy Costs Depreciation EBT Tax (21%) Net Income Cash Flows PV Factor @6% Present value NPV =D3*543 =D4*16.5 =D5*4.74 = 195000000/4 =D7-D8-D9-D10 =D11* 21% =D11-D12 =D13+D10 =1/(1+6%)^D2 =D14*D15 =E3*543 =E4*(16.5*1.03) =E5* (4.74*1.02) =195000000/4 =E7-E8-E9-E10 =E11*21% =E11-E12 =E13+E10 =1/(1+6%)^2 =E14*E15 =F3*543 =F4* (16.5*1.0342) =F5*(4.74*1.02^2) =195000000/4 =F7-F8-F9-F10 =F11*21% =F11-F12 =F13+F10 =1/(1+6%)^F2 =F14*F15 =G3*543 =G4*(16.5*1.0343) =G5*(4.74*1.0243) =195000000/4 G7-68-69-610 =G11*21% =G11-G12 =G13+G10 =1/(1+6%)^G2 =G14*G15 -195000000 =1/(1+6%)^0 =C14*C15 =C16+D16+E16+F16+G16 NPV = $53,962,898.04