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 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 $ 39,000 Sales revenue $ 20,000 $ 20,500 $ 21,000 $ 18,000 Operating costs 4,200 4,300 4,400 3,600 Depreciation 9,750 9,750 9,750 9,750 Net working capital spending 450 500 550 450 ?

Explanation / Answer

a

Thus, Incrental Income for Year-1= $ 3,751

2= $ 248

3=$ 248

4=$(-)1364

b

Thus, Incrental cash,

Year-1: $(-) 26,449

Year-2: $ 198

Year-3: $ 348

Year-4: $ 1036

c

Considering figure of part (b)

The NPV of the project is $ 1,599.75

Statement of net incremental income    (Amount in $) Years 1 2 3 4 sales revenue 20,000.00 20,500.00 21,000.00 18,000.00 oprating cost     4,200.00     4,300.00     4,400.00     3,600.00 depreciation     9,750.00     9,750.00     9,750.00     9,750.00 Profit Before Tax     6,050.00     6,450.00     6,850.00     4,650.00 Tax @ 38%     2,299.00     2,451.00     2,603.00     1,767.00 Net Income     3,751.00     3,999.00     4,247.00     2,883.00 Incremental Income     3,751.00        248.00        248.00 -1,364.00

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