After spending $9,700 on client-development, you have just been offered a big production by a new client. The contract will add $197,000 to your revenues for each of the next five years and it will cost you $96,000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully depreciated, but could be sold for $52,000 now. If you use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $34,000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $80,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $36,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 to $30,000. It will return to $20,000 at the end of the project. Your company's tax rate is 21% and your discount rate is 14.2%. What is the NPV of the contract? (Note: Assume that the equipment is put into use in year 1.)

After spending $9,700 on client-development, you have just been offered a big production by a new client. The contract will add $197,000 to your revenues for each of the next five years and it will cost you $96,000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully depreciated, but could be sold for $52,000 now. If you use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $34,000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $80,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $36,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 to $30,000. It will return to $20,000 at the end of the project. Your company's tax rate is 21% and your discount rate is 14.2%. What is the NPV of the contract? (Note: Assume that the equipment is put into use in year 1.)

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Description: After spending $9,700 on client-development, you have just been offered a big production contractby a new client. The contract will add $197,000 to your revenues for each of the next five years andit will cost you $96,000 per year to make the additi

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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