Problem 9-30 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 company's tax rate is 21% and your discount rate is 15%. What is the NPV of the contract? Year 0 1 2 3 4 5 6 Depreciation MACRS Schedule Depreciation NPV 20.00% 6,000 32.00% 9,600 19.20% 5,760 11.52% 3,456 11.52% 3,456 5.76% 1,728 Year Without Project 0 1 2 3 4 5 20,000 Change in NWC Net Working Capital Change in NWC Cash Flow 30,000 10,000 - 10,000 30,000 0 0 30,000 0 0 30,000 0 0 30,000 0 0 20,000 -10,000 10,000 Year 0 6 Revenues Costs Salary Depreciation Taxable Income 200,000 -100,000 -40,000 -6,000 54,000 -11,340 42,660 6,000 2 200,000 -100,000 -40,000 -9,600 50,400 -10,584 39,816 9,600 3 200,000 -100,000 -40,000 -5,760 54,240 -11,390 42,850 5,760 4 200,000 -100,000 -40,000 -3,456 56,544 -11,874 44,670 3,456 5 200,000 -100,000 -40,000 -3,456 56,544 -11,874 44,670 3,456 Tax 21% -1,728 -1,728 363 -1,365 1,728 Net Income Add back Depreciation CapEx Opportunity Cost CF from Change NWC FCF -30,000 -39,500 -10,000 0 0 0 0 10,000 0 NPV 0.00