Question

# The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated...

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 38 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment \$ 35,000 Sales revenue \$ 18,000 \$ 18,500 \$ 19,000 \$ 16,000 Operating costs 3,800 3,900 4,000 3,200 Depreciation 8,750 8,750 8,750 8,750 Net working capital spending 410 460 510 410 ? a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) Year 1 Year 2 Year 3 Year 4 Net income \$ \$ \$ \$ b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) Year 0 Year 1 Year 2 Year 3 Year 4 Cash flow \$ \$ \$ \$ \$ c. Suppose the appropriate discount rate is 11 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV \$

 A B C D E 1 Year 0 1 2 3 4 2 Investment -35000 3 Sales Revenue 18000 18500 19000 16000 4 Operating Costs 3800 3900 4000 3200 5 Deprecation 8750 8750 8750 8750 6 EBIT=Sale revenue-Operating costs-Depreciation 5450 5850 6250 4050 7 Taxes =EBIT*Tax Rate 2071 2223 2375 1539 8 EAT =EBIT -Taxes 3379 3627 3875 2511 9 add depreciation 8750 8750 8750 8750 10 minus Working capital 410 460 510 410 0 11 add recovery in total working capital 1790 12 Free Cash flow -35410 11719 11917 12115 12641 13 Discount Rate 11% NPV using Excel formula = NPV(A13,B12:E12)+A12 NPV \$2,005.16

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