After spending

$9,400

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

$102,000

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

$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

$32,000

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

$39,000

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

14.2%.

What is the NPV of the contract?

(Note:

Assume that the equipment is put into use in year

1.)

Question content area bottom

Part 1

Calculate the free cash flows below for years 0 through 2:(Round to the nearest dollar.)

Year 0Year 1Year 2Sales$$$- Cost of Goods SoldGross Profit$$$- Annual Cost- DepreciationEBIT$$$- TaxIncremental Earnings$$$+ Depreciation- Incremental Working Capital- Opportunity Cost- Capital InvestmentIncremental Free Cash Flow$$$

Part 2

Calculate the free cash flows below for years 3 through 6:

Year 3Year 4Year 5Year 6Sales$$$$- Cost of Goods SoldGross Profit$$$$- Annual Cost- DepreciationEBIT$$$$- TaxIncremental Earnings$$$$+ Depreciation- Incremental Working Capital- Opportunity Cost- Capital InvestmentIncremental Free Cash Flow$$$$

Part 3

The NPV of the project is

$enter your response here.

(Round to the nearest dollar.)