To determine:
Project Analysis:
Project analysis means analyzing the various related aspects of the project on the basis of the benchmarks previously decided by the firm and the deviations so located should be worked upon.
Net Present Value:
The net present value is the differential amount between the net
Explanation of Solution
Given,
The cost price of the facility is $750,000.
The estimated life of facility is 7 years.
The estimated revenue at the end of the first year is $635,000.
The current revenues are increased at 5% inflation rate per annum.
The estimated cost at the end of the first year of producing the units is $395,000.
The costs are increased at 4% per annum.
The real discount rate is 7%
The company falls under 34% of tax bracket.
Calculation of net present value,
Net Present Value | |||
Particulars | Present Value factor @ 12.35% |
Net Cash Flows ($) |
Present Value ($) |
Initial investment | 1 | (750,000) | (750,000) |
Year 1 | 0.89 | 194,829 | 173,398 |
Year 2 | 0.792 | 205,356 | 162,642 |
Year 3 | 0.705 | 216,514 | 152,642 |
Year 4 | 0.628 | 228,337 | 143,396 |
Year 5 | 0.559 | 240,866 | 134,644 |
Year 6 | 0.497 | 254,137 | 126,306 |
Year 7 | 0.443 | 268,194 | 118,810 |
Net Present Value | 261,838 |
Table (1)
Working notes:
Calculation of annual sales revenue for year 2,
Calculation of annual sales revenue for year 3,
Calculation of annual sales revenue for year 4,
Calculation of annual sales revenue for year 5,
Calculation of annual sales revenue for year 6,
Calculation of annual sales revenue for year 7,
Calculation of annual expenses for year 2,
Calculation of annual expenses for year 3,
Calculation of annual expenses for year 4,
Calculation of annual expenses for year 5,
Calculation of annual expenses for year 6,
Calculation of annual expenses for year 7,
Calculation of annual depreciation,
Calculation of nominal interest rate,
Calculation of annual cash flows,
Thus, the net present value is $261,838.
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Chapter 6 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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