Question

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 $

Answer #1

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 |

PLease Discuss in case of doubt

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