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Thread: Calculating NPV

  1. #1
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    Calculating NPV

    The question is:

    A company estimates 16,500 units of a new product could be sold annually over the next 8 years at a price of $23,500 each. Variable cost per unit is $19,700 and fixed costs total $31 million per year. Start up costs include 80 million to build production facilities, $4.50 million in land, and $15 million in net working capital. The $80 million facility is made up of a building valued at $12 million and $68 million of equipment. The building and equipment qualify for CCA rates of 4% and 20%, respectively. At the end of the project's life, the facilities (including the land) will be sold for an estimated $19.80 million. Assume the building's portion of this value will be $6.50 million. Start-up would also require initial expenses of $3.10 million, which are tax deductible. The company pays taxes at a 33% rate and uses a 16% discount rate on projects such as this one.


    1. What is the cash flow in year 0? ANSWER: -101,577,000
    2. What is the annual after-tax cash flow excluding the depreciation tax shield in the middle years of the project's life? (i.e. years 1-7)? ANSWER: 21,239,000
    3. What is the after tax cash flow excluding the depreciation tax shield in year 8? ANSWER: $56,039,000
    4. What is the PV of the CCA tax shield of the building and of the equipment? ANSWER: PVCCATSB = 606,523.39 PVCCATSE = 11,114,788.81
    5. What is the NPV,ANSWER: 13,012,725.12
    MY WORKINGS

    1. -80,000,000 - 4,500,000 - 15,000,000 - 31,00,000(1-.33) = -101,577,000

    2. [((-19,700*16,500)- 31,000,000)+(16,500*23,500](1-.33) = 21,239,000

    3. [19,800,000(salvage value) + 15,000,000(NWC)](1-.33) = 23,316,000 I can't figure out how to get this value.


    4. PVCCATSB = [(12000000(.33)(.04))/(.04+.16)]*[(1+.05(.04))/(1+.04)]  - [(6500000(.04)(.33))/(.04+.16)]*[(1)/(1.16)^8]


    I can't figure this part out either.

    Any help is appreciated.
    Last edited by ForeverConfused; Apr 9th 2017 at 03:18 PM.
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  2. #2
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    Re: Calculating NPV

    Also, I apologize for the weird text in the question.. I do not know why some words are messed up.
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  3. #3
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    Re: Calculating NPV

    Quote Originally Posted by ForeverConfused View Post
    Also, I apologize for the weird text in the question. I do not know why some words are messed up.
    Look at the first of your quotes: Much much messy text.
    Quote Originally Posted by ForeverConfused View Post
    The question is: A company estimates 16,500 units of a new product could be sold annually over the next 8 years at a price of $23,500 each. Variable cost per unit is $19,700 and fixed costs total $31 million per year. Start up costs include 80 million to build production facilities, $4.50 million in land, and $15 million in net working capital. The $80 million facility is made up of a building valued at $12 million and $68 million of equipment. The building and equipment qualify for CCA rates of 4% and 20%, respectively. At the end of the project's life, the facilities (including the land) will be sold for an estimated $19.80 million. Assume the building's portion of this value will be $6.50 million. Start-up would also require initial expenses of $3.10 million, which are tax deductible. The company pays taxes at a 33% rate and uses a 16% discount rate on projects such as this one.
    Now look at the same quote with no messy text.
    Quote Originally Posted by ForeverConfused View Post
    A company estimates 16,500 units of a new product could be sold annually over the next 8 years at a price of \$23,500 each. Variable cost per unit is \$19,700 and fixed costs total \$31 million per year. Start up costs include 80 million to build production facilities, \$4.50 million in land, and \$15 million in net working capital. The \$80 million facility is made up of a building valued at \$12 million and \$68 million of equipment. The building and equipment qualify for CCA rates of 4% and 20%, respectively. At the end of the project's life, the facilities (including the land) will be sold for an estimated \$19.80 million. Assume the building's portion of this value will be \$6.50 million. Start-up would also require initial expenses of \$3.10 million, which are tax deductible. The company pays taxes at a 33% rate and uses a 16% discount rate on projects such as this one
    How did is clean it up. Well simply by putting a backslash(\) in front of every dollar sign.
    On this site \$ are also LaTeX tags. It was not designed for dealing in dollars

    So without backslash $100 for your dreams$ looks funny.
    With a backslash \$100 for your dreams does not looks funny.
    That is a minor inconvenience for you. So use \ $.
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  4. #4
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    Re: Calculating NPV

    Quote Originally Posted by Plato View Post
    Look at the first of your quotes: Much much messy text.


    Now look at the same quote with no messy text.


    How did is clean it up. Well simply by putting a backslash(\) in front of every dollar sign.
    On this site \$ are also LaTeX tags. It was not designed for dealing in dollars

    So without backslash $100 for your dreams$ looks funny.
    With a backslash \$100 for your dreams does not looks funny.
    That is a minor inconvenience for you. So use \ $.
    Ah! thanks. Will keep that in mind for the future
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