10. A new factory at Arcata requires an initial outlay of $3.5 million to be pai

Question

10. A new factory at Arcata requires an initial outlay of $3.5 million to be paid immediately. The factory will last for eight additional years, after which it can be sold for a salvage value of $2,000,000. Sales will be $800,000 during the first year of operation and will grow at a rate of 9 percent a year after that. Variable costs will be 30 percent of sales and fixed costs will be $150,000 and grow at a rate of 5% per year. All costs are in cash. Assume cash flows occur at year-end. At a 6 percent required return. (Ignore taxes) The net present value of this project and is ?

Explanation / Answer

Expalantion

Profit = Sales- Variable cost- Fixed cost

NPV = -3500000+ present value of pf profits + 2000000/1.06^8= $1,329,056.53

Year Initial Cost Sales Variable cost Fixed cost Profit Salvage Value 0 -3500000 0 0 0 0 1 0 800000 240000 150000 410000 2 0 872000 261600 157500 452900 3 0 950480 285144 165375 499961 4 0 1036023 310807 173643.8 551572.49 5 0 1129265 338779.6 182325.9 608159.7641 6 0 1230899 369269.7 191442.2 670187.1804 7 0 1341680 402504 201014.3 738161.716 8 0 1462431 438729.4 211065.1 812636.8443 2000000 NPV $1,329,056.53

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