Question
You are asked to evaluate the following project for a corporation with profitable ongoing operations. The required investment on January 1 of this year is
You are asked to evaluate the following project for a corporation with profitable ongoing operations. The required investment on January 1 of this year is $25,000. The firm will depreciate the investment at a CCA rate of 20 percent. The firm is in the 40 percent tax bracket.
The price of the product on January 1 will be $100 per unit. That price will stay constant in real terms. Labour costs will be $12.50 per hour on January 1. They will increase at 1 percent per year in real terms. Energy costs will be $7.00 per physical unit on January 1; they will increase at 2.5 percent per year in real terms. The inflation rate is 3 percent. Revenue is received and costs are paid at year-end:
Year 1 | Year 2 | Year 3 | Year 4 | |
Physical production, in units | 110 | 220 | 270 | 110 |
Labour input, in hours | 1,000 | 1,000 | 1,000 | 1,000 |
Energy input, physical units | 180 | 180 | 180 | 180 |
The risk-free nominal discount rate is 7.1 percent. The real discount rate for costs and revenues is 4.1 percent. Calculate the NPV of this project. (Do not round intermediate calculations. Round the answer to 2 decimal places. Negative amount should be indicated by a minus sign. Omit $ sign in your response.)
Net present value $
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