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 $ 36,000 Year 2 Year 3 Year 4 Investment Sales revenue Operating costs Depreciation Net working capital spending $ 18,500$ 19,000$ 19,500 $ 16,500 3,300 9,000 3,900 9,000 470 4,000 9,000 520 4,100 9,000 420 420 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 Year 2 Year 3 Year 0 ear Cash floww c. Suppose the appropriate discount rate is 12 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

Requirment a Year 1 Year 2 Year 3 Year 4 Sales Revenue 18500 19000 19500 16500 Less: Operating Costs 3900 4000 4100 3300 Less: Depreciation 9000 9000 9000 9000 EBT 5600 6000 6400 4200 Less: Corporate Tax @ 38% 2128 2280 2432 1596 Net Income 3472 3720 3968 2604 Requirment b Year 0 Year 1 Year 2 Year 3 Year 4 Investment -36000 Net working capital Spending -420 Net Income 3472 3720 3968 2604 Add: Depreciation 9000 9000 9000 9000 Change in working capital -50 -50 100 420 Cash flow -36420 12422 12670 13068 12024 Requirment c Year 0 Year 1 Year 2 Year 3 Year 4 Cash flow -36420 12422 12670 13068 12024 PV factor @ 12% 1.00000 0.89286 0.79719 0.71178 0.63552 PV of cash flows -36420.00 11091.07 10100.45 9301.54 7641.47 NPV 1714.53 Note: PV = 1/(1+r)n

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