Problem 8-2 Calculating Project NPV The Freeman Manufacturing Company Is conslde

Question

Problem 8-2 Calculating Project NPV The Freeman Manufacturing Company Is consldering a neW Investment. Financial projections for the Investment are tabulated below. The corporate tax rate IS 38 percent. Assume all sales revenue is recelved In cash, all operating costs and Income taxes are pald 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 8 Year Year Year Year 4 25,88e Investment Sales revenue Operating costs Depreciation Net working capital spending $13,808 $13,588 $14,80e $11,8e8 2,2ee 6,258 2,800 6,258 368 2,988 6,258 418 3,880 6,258 318 318 a. Compute the Incremental net Income of the Investment for each year. (Do not round intermedlete calculetions.) Year 1 Year Year Year 4 Net income b. Compute the incremental cash flows of the investment for each year. (D negative answer should be indicated by minus sign.) not round Intermedlate calculations. A Year e Year Year Year Year 4 Cash flow c. Suppose the appropriate discount rate Is 10 percent What Is the NPV of the project? (Do not round Intermediate calculetions and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

A) Net incremental income can be calculated as: (sales - operating expenses - depreciation)*(1 - tax rate)

Year 1 = (13000-2800-6250)*(1-0.38) = 2449

Year 2 = (13500-2900-6250)*(1-0.38) = 2697

Year 3 = (14000-3000-6250)*(1-0.38) = 2945

Year 4 = (11000-2200-6250)*(1-0.38) = 1581

B) Incremental cash flows = Net income + Depreciation + Investment + Change in WC

Year 0: -25000-300 = -25300

Year 1: 2449+6250-(360-310) = 8649

Year 2: 2697+6250-(410-360) = 8897

Year 3: 2945+6250-(310-410) = 9295

Year 4: 1581+6250-(0-310) = 8141

C)

NPV = -25300 + 8649/1.1 + 8897/1.1^2 + 9295/1.1^3 + 8141/1.1^4

= 2459.50

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