Problem $9-30$

After spending $$10,000$ on client$-$development, you have just been offered a big production contract by a new client. The contract will add $$200,000$ to your revenues for each of the next $5$ years and it will cost you $$100,000$ per year to make the additional product. You will have to puse some existing equipment and buy new equipment as well. The existing equipment is fully depreciated, but could be sold for $$50,000$ now. If bou use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $$30,000,$ put it into use in year $1,$ land use the $5-$year MACRS schedule to depreciate it$.$ It will be worthless at the end of the project. Your current production manager earns I $$80,000$ per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $$40,000$ per year to help with the expansion. You will have to immediately increase your inventory from $$20,000$ to $$30,000.$ It will return to $$20,000$ at the end of the project. Your jcompany's tax rate is $21\%$ and your discount rate is $15\%.$ What is the NPV of the contract?

$5$

Depreciation

MACRS Schedule

Depreciation

$\backslash$table$[[,20,00\%,32\mathrm{.}00\%,19\mathrm{.}20\%,11\mathrm{.}52\%,11\mathrm{.}52\%,5\mathrm{.}76],[,6,000,9,600,5,760,3,456,3,456,1,72]]$

NPV

Change in NWC

Net Working Capital

Change in NWC

Cash Flow

Year Without Project

$0$

$1$

$2$

$3$

$4$

$5$

Year

Revenues

Costs

Salary

Depreciation

Taxable Income.

Tax

$21\%$

Net Income

Add back Depreciation

CapEx

Opportunity Cost

CF from Change NWC

FCF

$\backslash$table$[[20,000,30,000,30,000,30,000,30,000,30,000,20,000],[,10,000,0,0,0,0,-10,000$