Client development-big production contract by new client

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Reference no: EM131882588

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 foreach of the next 5 years and it will cost you $100,000 per year to make the additionalproduct. You will have to use some existing equipment and buy new equipment aswell. The existing equipment is fully depreciated, but could be sold for $50,000 now.If you use it in the project, it will be worthless at the end of the project. You will buynew equipment valued at $30,000 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 hirean assistant at $40,000 per year to help with the expansion. You will have to increaseyour inventory immediately from $20,000 to $30,000. It will return to $20,000 at theend of the project. Your company’s tax rate is 35% and your discount rate is 15%.What is the NPV of the contract?

Reference no: EM131882588

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