After spending
$10,200
on client-development, you have just been offered a big production contract by a new client. The contract will add
$204,000
to your revenues for each of the next five years and it will cost you
$99,000
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
$54,000
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
$25,000
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
$45,000
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
14.7%.
What is the NPV of the contract?
(Note:
Assume that the equipment is put into use in year
1.)