The Best Manufacturing Company is considering a new investment. Financial projec

Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 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. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) Suppose the appropriate discount rate is 11 percent. What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

Ans a Calculation of Incremental net income Year 0 Year 1 Year 2 Year 3 Year 4 Sales Revenue 0 17000 17500 18000 15000 Less: Operating Costs 0 3600 3700 3800 3000 Depreciation 0 8250 8250 8250 8250 Income Before Tax 0 5150 5550 5950 3750 Less: Tax@40% 0 2060 2220 2380 1500 Net income 0 3090 3330 3570 2250 Ans b Calculation of Incremental Cash Flows Year 0 Year 1 Year 2 Year 3 Year 4 Sales Revenue 0 17000 17500 18000 15000 Less: Operating Costs 0 3600 3700 3800 3000 Depreciation 0 8250 8250 8250 8250 Income Before Tax 0 5150 5550 5950 3750 Less: Tax@40% 0 2060 2220 2380 1500 Net income 0 3090 3330 3570 2250 Add Depreciation 0 8250 8250 8250 8250 Less: Net Working Capital Spending 390 440 490 390 -1710 Investment 33000 Cash Flows -33390 10900 11090 11430 12210 Ans c At Discount Rate 11% Year Cash Flow Discounting Factor Present Value(CF*DF) 0 -33390 1 1 -33390.00 1 10900 1/1.11 1 9819.81 2 11090 1/(1.11)2 1 9000.64 3 11430 1/(1.11)3 1 8356.47 4 12210 1/(1.11)4 1 8042.73 Net Present Value 1829.65

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.