Dickinson Brothers, Inc., is considering investing in a machine to produce compu

Question

Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $991,000, and its economic life is five years. The machine will be fully depreciated by the straight-line method. The machine will produce 36,000 keyboards each year. The price of each keyboard will be $35 in the first year and will increase by 6 percent per year. The production cost per keyboard will be $14 in the first year and will increase by 7 percent per year. The project will have an annual fixed cost of $211,000 and require an immediate investment of $41,000 in net working capital. The corporate tax rate for the company is 35 percent.

The appropriate discount rate is 12 percent. What is the NPV of the investment? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) ***Please Explain Using Excel***

Explanation / Answer

Price of the machine = $991,000

Economic life = 5 years

Depreciation = 9991000/5 = 198200

The present value is calculated by using excel formula PV(rate,nper,pmt,fv)

Sum of present value = 1753381.83

Firm value is the sum of present value of all future cash flow.

Initial cost = 991000

NPV = 1753381.83 - 991000 = 762381.83

Period 1 2 3 4 5 selling price per keyboard 35 35*1.06 = 37.10 39.33 41.69 44.19 Total keyboards 36000 36000 36000 36000 36000 Total revenue 35*36000= 1260000 1335600 1415736 1500680.16 1590720.97 Cost price per keyboard 14 14*1.07= 14.98 16.03 17.15 18.35 Total cost 14*36000= (504000) (539280) (577029.60) (617421.67) (660641.19) Operating profit 756000 796320 838706.40 883258.49 930079.78 Tax (35%) (264600) (278712) (293547.24) (309140.47) (325527.92) EBIT(1 - tax) 491400 517608 545159.16 574118.02 604551.86 Depreciation 198200 198200 198200 198200 198200 Capital Expenditure (211000) (211000) (211000) (211000) (211000) net working capital (41000) (41000) (41000) (41000) (41000) Unlevered cash flow 437600 463808 491359.16 520318.02 550751.86 Discount rate 12% 12% 12% 12% 12% pesent value 390714.29 369744.90 349739.74 330671.51 312511.39

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