Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 24 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 $ 26,700 Sales revenue $ 13,800 $ 15,400 $ 16,800 $ 13,300 Operating costs 3,100 3,200 4,600 3,200 Depreciation 6,675 6,675 6,675 6,675 Net working capital spending 320 220 265 170 ?

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 12 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

Incremental Net income:
		Year-1	Year-2	Year-3	Year-4
Annual revenue		13800	15400	16800	13300
Less: Operating cost		3100	3200	4600	3200
Less: Depreciation		6675	6675	6675	6675
Before tax Income		4025	5525	5525	3425
Less: Tax @ 24%		966	1326	1326	822
After Tax Income		3059	4199	4199	2603
Incremental Cashflows
		Year0	YEar1	YEar2	YEara3	YEar4
After tax Income			3059	4199	4199	2603
Add: Dep			6675	6675	6675	6675
Annual Operating cashflows			9734	10874	10874	9278
WC changes		-320	-220	-265	-170	975
Initial Investment		-26700
Net cashflows		-27020	9514	10609	10704	10253
PVf at 12%		1	0.892857	0.797194	0.71178	0.63552
Present value of CF		-27020	8494.643	8457.43	7618.896	6515.97
NPV		4067