After spending $10,000 on client-development, you have just been offered a big production contract by a new client. The contract will add $200,000 to your revenues for each of the next 5 years and it will cost you $100,000 per year 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 $50,000 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 $30,000, put it into use in year 1, 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 $80,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $40,000 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 companys tax rate is 35% and your discount rate is 15%. What is the NPV of the contract?

Year 3 4 5 Depreciation MACRS Schedule Depreciation Year Without Project 0 2 4 Change in NWC Net Working Capital Change in NWC Year 0 4 Depreciation Taxable Income ome Opportunity Cost CF from Change NWC Answer: 70,452.55