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:

Lubricants

Substances that are applied to surfaces to reduce friction and wear between moving parts.

Variable Overhead Rate Variance

The difference between the actual variable overhead incurred and the expected variable overhead based on the predetermined overhead rate.

Power

In a business context, it often refers to the influence or capacity of a company or individual to effect decisions and control resources.

Variable Overhead Rate Variance

The difference between the actual variable overhead incurred and the standard cost of the variable overhead applied to a production process.