The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 22 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 $ 28,000 Sales revenue $ 15,100 $ 16,700 $ 18,100 $ 14,600 Operating costs 3,750 3,525 5,900 4,500 Depreciation 7,000 7,000 7,000 7,000 Net working capital spending 385 285 395 235 ?
a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)
b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign.)
c. Suppose the appropriate discount rate is 9 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.)
| 0 | 1 | 2 | 3 | 4 | ||
| Sales revenue | $ 15,100.00 | $ 16,700.00 | $ 18,100.00 | $ 14,600.00 | ||
| Operating costs | $ 3,750.00 | $ 3,525.00 | $ 5,900.00 | $ 4,500.00 | ||
| Depreciation | $ 7,000.00 | $ 7,000.00 | $ 7,000.00 | $ 7,000.00 | ||
| EBIT | $ 4,350.00 | $ 6,175.00 | $ 5,200.00 | $ 3,100.00 | ||
| Tax at 22% | $ 957.00 | $ 1,358.50 | $ 1,144.00 | $ 682.00 | ||
| a) | Incremental NOPAT | $ 3,393.00 | $ 4,816.50 | $ 4,056.00 | $ 2,418.00 | |
| Add: Depreciation | $ 7,000.00 | $ 7,000.00 | $ 7,000.00 | $ 7,000.00 | ||
| OCF | $ 10,393.00 | $ 11,816.50 | $ 11,056.00 | $ 9,418.00 | ||
| Capital spending | $ 28,000.00 | |||||
| NWC spending | $ 385.00 | $ 285.00 | $ 395.00 | $ 235.00 | ||
| Recovery of NWC | $ 1,300.00 | |||||
| b) | Incremental cash flows | $ -28,000.00 | $ 10,008.00 | $ 11,531.50 | $ 10,661.00 | $ 10,483.00 |
| c) | PVIF at 9% [PVIFA = 1/1.09^t] | 1 | 0.91743 | 0.84168 | 0.77218 | 0.70843 |
| PV at 9% | $ -28,000.00 | $ 9,181.65 | $ 9,705.83 | $ 8,232.25 | $ 7,426.42 | |
| NPV | $ 6,546.15 |
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