The Freeman Manufacturing Company is considering a new investment. Financial pro

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.

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.)

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 ?

Explanation / Answer

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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