Dickinson Brothers, Inc., is considering investing in a machine to produce compu
ID: 2810020 • Letter: D
Question
Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $992,000, and its economic life is five years. The machine will be fully depreciated by the straight-line method. The machine will produce 37,000 keyboards each year. The price of each keyboard will be $35 in the first year and will increase by 5 percent per year. The production cost per keyboard will be $15 in the first year and will increase by 6 percent per year. The project will have an annual fixed cost of $212,000 and require an immediate investment of $42,000 in net working capital. The corporate tax rate for the company is 38 percent. The appropriate discount rate is 10 percent. What is the NPV of the investment?
Explanation / Answer
Year
Cash outflows
Cash inflows
Depreciation = D = 992000/5
Net Working capital = NWC
Net Cash flows = Cash outflow + NWC
Discount factor = Df = 1/(1+Rate)^Year
Present Values
0
-992000.00
0.00
0.00
-42,000.00
-1,034,000.00
1.000000
-1,034,000.00
Co
Ci
D
NWC
Net Cash flow = (Co+Ci-D)x(1-Tax)+D+NWC
Df = 1/(1+10%)^Year
Df x Net Cash flows
1
-767,000.00
1,295,000.00
198,400.00
402,752.00
0.909091
366,138.2184
2
-800,300.00
1,359,750.00
198,400.00
422,251.00
0.826446
348,967.6499
3
-835,598.00
1,427,737.50
198,400.00
442,518.49
0.751315
332,470.7793
4
-873,013.88
1,499,124.38
198,400.00
463,580.51
0.683013
316,631.5128
5
-912,674.71
1,574,080.59
198,400.00
42,000.00
527,463.65
0.620921
327,513.2547
Total = NPV =
657,721.42
Growth of 6% in expense (not on fixed cost) is provided and growth rate of 5% in revenues are provided.
NPV =
$657,721.42
Year
Cash outflows
Cash inflows
Depreciation = D = 992000/5
Net Working capital = NWC
Net Cash flows = Cash outflow + NWC
Discount factor = Df = 1/(1+Rate)^Year
Present Values
0
-992000.00
0.00
0.00
-42,000.00
-1,034,000.00
1.000000
-1,034,000.00
Co
Ci
D
NWC
Net Cash flow = (Co+Ci-D)x(1-Tax)+D+NWC
Df = 1/(1+10%)^Year
Df x Net Cash flows
1
-767,000.00
1,295,000.00
198,400.00
402,752.00
0.909091
366,138.2184
2
-800,300.00
1,359,750.00
198,400.00
422,251.00
0.826446
348,967.6499
3
-835,598.00
1,427,737.50
198,400.00
442,518.49
0.751315
332,470.7793
4
-873,013.88
1,499,124.38
198,400.00
463,580.51
0.683013
316,631.5128
5
-912,674.71
1,574,080.59
198,400.00
42,000.00
527,463.65
0.620921
327,513.2547
Total = NPV =
657,721.42
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.