Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I need some help asap, it is very much appreciated! After spending $9,000 on client-development, you have just been offered a big production contract by

I need some help asap, it is very much appreciated!image text in transcribedimage text in transcribedimage text in transcribed

After spending $9,000 on client-development, you have just been offered a big production contract by a new client. The contract will add $193,000 to your revenues for each of the next five years and it will cost you $101,000 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 $54,000 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 $28,000 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 $85,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $38,000 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 15.8%. 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 0 through 2: (Round to the nearest dollar.) Year 0 Year 1 Year 2 Sales $ - Cost of Goods Sold Gross Profit - Annual Cost - Depreciation EBIT - Tax Incremental Earnings $ + Depreciation - Incremental Working Capital - Opportunity Cost - Capital Investment Incremental Free Cash Flow 69 69 $ $ 69 69 69 Calculate the free cash flows below for years 3 through 6: Year 3 Sales - Cost of Goods Sold Gross Profit - Annual Cost - Depreciation EBIT - Tax Incremental Earnings + Depreciation - Incremental Working Capital - Opportunity Cost - Capital Investment Incremental Free Cash Flow The NPV of the project is $ EA 69 69 69 Year 4 (Round to the nearest dollar.) Year 5 69 69 69 69 69 69 Year 6 After spending $9,000 on client-development, you have just been offered a big production contract by a new client. The contract will add $193,000 to your revenues for each of the next five years and it will cost you $101,000 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 $54,000 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 $28,000 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 $85,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $38,000 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 15.8%. 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 0 through 2: (Round to the nearest dollar.) Year 0 Year 1 Year 2 Sales $ - Cost of Goods Sold Gross Profit - Annual Cost - Depreciation EBIT - Tax Incremental Earnings $ + Depreciation - Incremental Working Capital - Opportunity Cost - Capital Investment Incremental Free Cash Flow 69 69 $ $ 69 69 69 Calculate the free cash flows below for years 3 through 6: Year 3 Sales - Cost of Goods Sold Gross Profit - Annual Cost - Depreciation EBIT - Tax Incremental Earnings + Depreciation - Incremental Working Capital - Opportunity Cost - Capital Investment Incremental Free Cash Flow The NPV of the project is $ EA 69 69 69 Year 4 (Round to the nearest dollar.) Year 5 69 69 69 69 69 69 Year 6

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Valuation

Authors: James R. Hitchner

4th Edition

1119286603, 978-1119286608

More Books

Students also viewed these Finance questions