The Best Manufacturing Company is considering a new investment. Financial projec
ID: 2774447 • 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 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?
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.
Explanation / Answer
a) Incremental Net Income = (Sales Revenue - Operating Costs - Depreciation) * (1 - Tax Rate)
Tax Rate = 40%
b) Incremenatal Cash Flows
For year 0, cash flow = Investment + Working Capital Spending
For year 1 to 3 , cash flow = (Sales - Operating Costs)*(1 - Tax rate) + Tax rate * Depreciation -
Net Working Capital Spending
For year 4 , cash flow = (Sales - Operating Costs)*(1 - Tax rate) + Tax rate * Depreciation
+ Working Capital Recovery
Working Capital Recovery in year 4 = Working capital spending during years 0 to 3
= 490 + 540 + 590 + 490 = $2,110
c) Discount Rate = 11%
The cash flows are as follows:
Thus, NPV of the project is the sum of the discounted cash flows = $2,298.77
Year 1 Year 2 Year 3 Year 4 Sales revenue 22000 22500 23000 20000 Operating costs 4600 4700 4800 4000 Depreciation 10750 10750 10750 10750 Incremental Net Income 3990 4230 4470 3150Related Questions
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