Recalculate the NPV for the Proposal in Question 94, Now

question 102

Essay

Recalculate the NPV for the proposal in question 94, now assuming that the $45,000 in annual revenues will grow at a 6 percent annual rate and that the $15,000 in annual expenses will grow at a 5 percent annual rate.Does this change your decision on the project? Explain the implications of the difference between the two questions' results.
$$\begin{array} { | l | r | r | r | r | r | r | } \hline & { \text { Year 0 } } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & { \text { Year 4 } } & { \text { Year 5 } } \\\hline \text { Cost } & - 100,000 & & & & & \\\hline \text { Charige in Workirg } & & & & & & \mathbf { 8 , 0 0 0 } \\\hline \text { Capital } & - 8,000 & & & & & \\\hline \text { Reveruses } & 45,000 & 47,700 & 50,562 & 54,101 & 57,888 & \\\hline \text { - Expenses } & 15,000 & 15,750 & 16,538 & 17,364 & 18,580 & \\\hline \text { - Dep } & & 19,000 & 19,000 & 19,000 & 19,000 & 19,000 \\\hline \text { = Pretax Profit } & & 11,000 & 12,950 & 15,024 & 17,737 & \mathbf { 2 0 , 3 0 8 } \\\hline \text { Taxes } & & 3,850 & 4,533 & 5,258 & 6,208 & 7,108 \\\hline \text { Profit } & & 7,150 & \mathbf { 8 , 4 1 7 } & 9,766 & 11,529 & 13,200 \\\hline \text { Salvage Value } & & & & 5,000 & & \\\hline \text { Tax effect } & & & & & 0 & \\\hline \text { Cash Flows } & - 108,000 & 26,150 & 24,417 & 28,766 & 30,529 & 45,200 \\\hline\end{array}$$

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Definitions:

Real Capital

Physical assets like buildings, machinery, and equipment used in the production of goods and services, excluding financial assets and human capital.

Past Saving

The accumulation of previously saved money or assets that can be used for future investments or expenditures.

Investment

The allocation of resources, such as capital, to generate income or profit.

Standard of Living

A measure of the wealth, comfort, material goods, and necessities available to a certain socioeconomic class or a certain geographic area.