The Best Manufacturing Company is considering a new investment. Financial projec
ID: 2724110 • Letter: T
Question
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. 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.
Year 1
Year 2
Year 3
Year 4
Investment
$24,000
Sales revenue
$12,500
$13,000
$13,500
$10,500
Operating costs
$2,700
$2,800
$2,900
$2,100
depreciation
$6,000
$6,000
$6,000
Net working capital spending
$300
$350
$400
$300
?
(A) Compute the incremental net income of the investment for each year?
(B) Compute the incremental cash flows of the investment for each year?
(C) Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
Year 1
Year 2
Year 3
Year 4
Investment
$24,000
Sales revenue
$12,500
$13,000
$13,500
$10,500
Operating costs
$2,700
$2,800
$2,900
$2,100
depreciation
$6,000
$6,000
$6,000
Net working capital spending
$300
$350
$400
$300
?
Explanation / Answer
Year 1
Year 2
Year 3
Year 4
Investment
Sales revenue
$12,500
$13,000
$13,500
$10,500
Operating costs
($2,700)
($2,800)
($2,900)
($2,100)
depreciation
($6,000)
($6,000)
($6,000)
PBT
$9800
$4200
$4600
$2400
Tax 34
($3332)
($1428)
($1564)
($816)
PAT
$6468
$2772
$3036
$1584
Depreciation (non cash
$6000
$6000
$6000
Working capital
($350)
($ 400)
($300)
$1350
CFAT
$6118
$8372
$8736
$8934
Discounting factor
.892
.797
.712
.636
PV of cash inflow
$5457
$6672
$6220
$5682
Total PV of cash inflow =$ 24031
Initial cash outflow =$ 24300
NPV -269
Year 1
Year 2
Year 3
Year 4
Investment
Sales revenue
$12,500
$13,000
$13,500
$10,500
Operating costs
($2,700)
($2,800)
($2,900)
($2,100)
depreciation
($6,000)
($6,000)
($6,000)
PBT
$9800
$4200
$4600
$2400
Tax 34
($3332)
($1428)
($1564)
($816)
PAT
$6468
$2772
$3036
$1584
Depreciation (non cash
$6000
$6000
$6000
Working capital
($350)
($ 400)
($300)
$1350
CFAT
$6118
$8372
$8736
$8934
Discounting factor
.892
.797
.712
.636
PV of cash inflow
$5457
$6672
$6220
$5682
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