Santo Automotive is considering producing a new automobile product, No Text, whi
ID: 2559643 • Letter: S
Question
Santo Automotive is considering producing a new automobile product, No Text, which disengages the ability to text while driving. Marketing data indicate that the company will be able to sell 39,000 units per year at $16 each. The product will be produced in a section of an existing factory that is currently not in use. To produce No Text, Santo must buy a machine that costs $820,000. The machine has an expected life of five years and will have an ending residual value of $50,000. Santo expects to generate net income of $56,000 per year. The income tax rate is 30% and the company’s required rate of return is 10%. How much is the net present value?
Explanation / Answer
Calculation of Net Present Value
Years
Amount of Cash Flow
Tax Effect
After Tax Cash Flow
P V Factor @ 10%
Present Value of Cash Flow
(1)
(2)
(1*2) = 3
(4)
(3*4)
Net Annual Cash inflow
1-5
56000
70.00%
39200
3.7908
148599
Depreciation Tax Shiled
1-5
154000
30.00%
46200
3.7908
175135
Residual Value
5
50000
70.00%
35000
0.6209
21732
Cost of Machine
1
(820,000)
-
(820,000)
1
(820,000)
Net Present Value
(474,534)
Calculation of Depreciation
820000-50000
=
154000
5
Calculation of Net Present Value
Years
Amount of Cash Flow
Tax Effect
After Tax Cash Flow
P V Factor @ 10%
Present Value of Cash Flow
(1)
(2)
(1*2) = 3
(4)
(3*4)
Net Annual Cash inflow
1-5
56000
70.00%
39200
3.7908
148599
Depreciation Tax Shiled
1-5
154000
30.00%
46200
3.7908
175135
Residual Value
5
50000
70.00%
35000
0.6209
21732
Cost of Machine
1
(820,000)
-
(820,000)
1
(820,000)
Net Present Value
(474,534)
Calculation of Depreciation
820000-50000
=
154000
5
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