Kopperud Electronics has an investment opportunity to produce a new HDTV. Therequired investment on January 1 of this year is $150 million. The depreciation value forthis company, expressed in nominal terms, is calculated by depreciating the investmentto zero using the straight-line method over four years. The investment has no resale valueafter completion of the project. The firm has a 22 percent tax rate. The price of theproduct will be$471 per unit, in real terms, and will not change over the life of theproject. Labor costs for Year 1 will be $16.05 per hour, in real terms, and will increase at1 percent per year in real terms. Energy costs for Year 1 will be$4.38 per physical unit,in real terms, and will increase at 2 percent per year in real terms. The inflation rate is4 percent per year. Revenues are received and costs are paid at year-end. Refer to thefollowing table for the production schedule:The real discount rate for the project is 7 percent. Calculate the NPV of this project.Year 1 Year 2 Year 3 Year 4Physical production, in units 159,000 179,000 194,000 162,000Labor input, in hours 1,190,000 1,340,000 1,367,000 1,287,000Energy input, physical units 217,000 232,000 262,000 247,000

Question

Kopperud Electronics has an investment opportunity to produce a new HDTV. The
required investment on January 1 of this year is $150 million. The depreciation value for this company, expressed in nominal terms, is calculated by depreciating the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the project. The firm has a 22 percent tax rate. The price of the product will be$471 per unit, in real terms, and will not change over the life of the
project. Labor costs for Year 1 will be $16.05 per hour, in real terms, and will increase at 1 percent per year in real terms. Energy costs for Year 1 will be$4.38 per physical unit,
in real terms, and will increase at 2 percent per year in real terms. The inflation rate is
4 percent per year. Revenues are received and costs are paid at year-end. Refer to the
following table for the production schedule:
The real discount rate for the project is 7 percent. Calculate the NPV of this project.
Year 1 Year 2 Year 3 Year 4
Physical production, in units 159,000 179,000 194,000 162,000
Labor input, in hours 1,190,000 1,340,000 1,367,000 1,287,000
Energy input, physical units 217,000 232,000 262,000 247,000