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 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 0 Year 1 Year 2 Year 3 Year 4 Investment $ 27,000 Sales revenue $ 14,000 $ 14,500 $ 15,000 $ 12,000 Operating costs 3,000 3,100 3,200 2,400 Depreciation 6,750 6,750 6,750 6,750 Net working capital spending 330 380 430 330 ?

Explanation / Answer

Answer:

Incremental net income Year 1 2 3 4 Sales revenue 14000 14500 15000 12000 Operating costs 3000 3100 3200 2400 Depreciation 6750 6750 6750 6750 Income before taxes 4250 4650 5050 2850 Taxes 1445 1581 1717 969 Net income 2805 3069 3333 1881 Incremental cash outflow of the investment Year 0 1 2 3 4 Net income 2805 3069 3333 1881 Depreciation 6750 6750 6750 6750 OCF 9555 9819 10083 8631 Investment -27000 Addition to NWC -330 -380 -430 -330 1470 Incremental cashoutflow -27330 9175 9389 9753 10101

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