The Best Manufacturing Company is considering a new investment. Financial projec
ID: 2761868 • 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 38 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 $ 35,000
Sales revenue $ 18,000 $ 18,500 $ 19,000 $ 16,000
Operating costs 3,800 3,900 4,000 3,200
Depreciation 8,750 8,750 8,750 8,750
Net working capital spending 410 460 510 410 ?
a.Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)
Year 1 Year 2 Year 3 Year 4
Net income $ $ $ $
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.)
Year 0 Year 1 Year 2 Year 3 Year 4
Cash flow $ $ $ $ $
c. Suppose the appropriate discount rate is 11 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.)
NPV $
Explanation / Answer
Year
0
1
2
3
4
Sales
$18,000.00
$18,500.00
$19,000.00
$16,000.00
Less: Costs
$3,800.00
$3,900.00
$4,000.00
$3,200.00
Less: Depreciation
$8,750.00
$8,750.00
$8,750.00
$8,750.00
EBIT
$5,450.00
$5,850.00
$6,250.00
$4,050.00
Less: Tax @ 38%
$2,071.00
$2,223.00
$2,375.00
$1,539.00
Net Income
$3,379.00
$3,627.00
$3,875.00
$2,511.00
OCF
$0.00
$12,129.00
$12,377.00
$12,625.00
$11,261.00
Capital Spending
-$35,000.00
NWC
-$410.00
-$460.00
-$510.00
-$410.00
$1,790.00
Incremental Cash Flow
-$35,410.00
$11,669.00
$11,867.00
$12,215.00
$13,051.00
Formulas used:
OCF = Net Incremental Income + Depreciation
Incremental Cash Flow = OCF + Capital Spending + NWC
NPV = -$35,410 + {$11,699/(1+.11)1} + {$11,867/(1+.11)2} + {$12,215/(1+.11)3} + {$13,051/(1+.11)4}
=$2,262.73
Year
0
1
2
3
4
Sales
$18,000.00
$18,500.00
$19,000.00
$16,000.00
Less: Costs
$3,800.00
$3,900.00
$4,000.00
$3,200.00
Less: Depreciation
$8,750.00
$8,750.00
$8,750.00
$8,750.00
EBIT
$5,450.00
$5,850.00
$6,250.00
$4,050.00
Less: Tax @ 38%
$2,071.00
$2,223.00
$2,375.00
$1,539.00
Net Income
$3,379.00
$3,627.00
$3,875.00
$2,511.00
OCF
$0.00
$12,129.00
$12,377.00
$12,625.00
$11,261.00
Capital Spending
-$35,000.00
NWC
-$410.00
-$460.00
-$510.00
-$410.00
$1,790.00
Incremental Cash Flow
-$35,410.00
$11,669.00
$11,867.00
$12,215.00
$13,051.00
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.