Question

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

The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 34 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.

Investment $ 41,000
Sales revenue $ 21,000 $ 21,500 $ 22,000 $ 19,000
Operating costs 4,400 4,500 4,600 3,800
Depreciation 10,250 10,250 10,250 10,250
Net working capital spending 470 520 570 470 ?

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 answer should be indicated by a minus sign.)

c. Suppose the appropriate discount rate is 13 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.)

Homework Answers

Answer #1

Statement showing net income of the investment for each year,cash flows of the investment for each year and NPV

Ans Particulars 0 1 2 3 4 NPV
Investment -41000
Net working capital -470
Sales revenue 21000 21500 22000 19000
Less
Operating cost 4400 4500 4600 3800
Depeciation 10250 10250 10250 10250
PBT 6350 6750 7150 4950
Tax @ 34% 2159 2295 2431 1683
a PAT/Net income 4191 4455 4719 3267
Add: depreciation 10250 10250 10250 10250
Annaul cash flow 14441 14705 14969 13517
Changes in WC -520 -570 -470 2030
b Total cash flow -41470 13921 14135 14499 15547
PVIF @ 13% 1 0.8850 0.7831 0.6931 0.6133
c Present value -41470.00 12319.47 11069.78 10048.53 9535.27 1503.05
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