After spending

$10,900

on client-development, you have just been offered a big production contract by a new client. The contract will add

$205,000

to your revenues for each of the next five years and it will cost you

$97,000

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

$53,000

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

$81,000

per year. Since she is busy with ongoing projects, you are planning to hire an assistant at

$45,000

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

21%

and your discount rate is

16%.

What is the NPV of the contract?

(Note:

Assume that the equipment is put into use in year

1.)

After spending $10.900 on client development, you have just been offered a big production contract by a new client. The contract will add $205.000 to your revenues for each of the next five years and it will cost you $97,000 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 $53,000 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 $61,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $45,000 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 21% and your discount rate is 16%. What is the NPV of the contract? (Note: Assume that the equipment is put into use in year 1.) Calculate the free cash flows below for years 3 through 6: Year 3 Year 4 Year 5 Year 6 Sales s $ $ Cost of Goods Sold s $ $ $ Gross Profit - Annual Cost - Depreciation EBIT SI $ $ $ $ - Tax Incremental Eamings + Depreciation - Incremental Working Capital Opportunity Cost Capital Investment Incremental Free Cash Flow $ $ Help me solve this View an example Get more help Clear all Check answer Calculate the free cash flows below for years 0 through 2: (Round to the nearest dollar.) Year 0 Year 1 Year 2 Sales 0 205,000 $ 205,000 Cost of Goods Sold 0 97,000 97,000 Gross Profit 0 108,000 $ 108,000 - Annual Cost 45,000 45,000 - Depreciation 0 5,800 9,280 EBIT $ 0 $ 57,200 53,720 - Tax 0 12,012 11,281 0 $ 45,188 $ 42,439 0 5,800 9,280 Incremental Earnings + Depreciation - Incremental Working Capital - Opportunity Cost - Capital Investment 10,000 0 0 0 0 41,870 29,000 0 0 Incremental Free Cash Flow $ (80,870) $ 50,988 $ 51,719