The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic
ID: 2735719 • Letter: T
Question
The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s. They expect to sell 250 blocks annually for the next 5 years. The necessary foundry and machining equipment will cost a total of $800,000 and will be depreciated on a SL basis to zero over the project's life. The firm expects to be able to sell the equipment for $150,000 at the end of 5 years. Labor and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate. What is the expected after-tax cash flow to the firm when the equipment is sold in year five? Assume that management believes that auto restorers will pay $3,000 per block. What is the NPV of this project?
Explanation / Answer
Answer
We have been provided with the information that,
machining equipment will cost a total of $800,000
e depreciated on a SL basis to zero over the project's life.
Salvage value $150,000 at the end of 5 years
Cost of equipment
800000
Salvage value
150000
Net Value
650000
Life od assets
5 year
Depriciation
=650,000/ 5
130000
Sell of block
250
Price Per Block
3000
Total Revenue
3000*250
750000
Less:
Labour Cost
250*500
125000
Cntribution margin
625000
Less:
Fixed Cost
125000
Net income
500000
Less:
Tax@35%
175000
Income After Tax
325000
Add:
Depriciation Tax Shelter
=130,000*0.35
45500
Net Cash Flow
370500
Calculation of NPV is as follow
Year
Cash
Flow
Salvage
Value
Net Cash
Low
PV Factor@12%
Prasent
Value
0
-800,000
-800000
1
-800000
1
370500
370500
0.892857143
330803.5714
2
370500
370500
0.797193878
295360.3316
3
370500
370500
0.711780248
263714.5818
4
370500
370500
0.635518078
235459.448
5
370500
150,000
520500
0.567426856
295345.6784
620683.6113
NPV of the project is $ 620,683.61
Cost of equipment
800000
Salvage value
150000
Net Value
650000
Life od assets
5 year
Depriciation
=650,000/ 5
130000
Sell of block
250
Price Per Block
3000
Total Revenue
3000*250
750000
Less:
Labour Cost
250*500
125000
Cntribution margin
625000
Less:
Fixed Cost
125000
Net income
500000
Less:
Tax@35%
175000
Income After Tax
325000
Add:
Depriciation Tax Shelter
=130,000*0.35
45500
Net Cash Flow
370500
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.