Question

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.)

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