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