Question

Q1.

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 22 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	$	27,000
Sales revenue			$	14,100	$	15,700	$	17,100	$	13,600
Operating costs				3,250		3,275		4,900		3,500
Depreciation				6,750		6,750		6,750		6,750
Net working capital spending		335		235		295		185		?

a.	Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)

   

b.	Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign.)

   

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.)

Answer 1

rate positively ..

Ans 1	Computation of net income
	Particular	Year 0	Year 1	Year 2	Year 3	Year 4
	Sales revenue		$               14,100	$               15,700	$               17,100	$            13,600
	Less:
	Operating costs		$        3,250	$        3,275	$        4,900	$      3,500
	Depreciation		$        6,750	$        6,750	$        6,750	$      6,750
	Profit before tax		$        4,100	$        5,675	$        5,450	$      3,350
	Tax @ 22%		$           902	$        1,249	$        1,199	$         737
	Net income		$        3,198	$        4,427	$        4,251	$      2,613
Ans 2	Incremental cash flows
	Particular	Year 0	Year 1	Year 2	Year 3	Year 4
i	Investment	$     (27,000)
ii	Net working capital	$            335	$           235	$           295	$           185
iii	Change in working capital	$          (335)	$           100	$           (60)	$           110	$         185
iv	Net income		$        3,198	$        4,427	$        4,251	$      2,613
v	Depreciation		$        6,750	$        6,750	$        6,750	$      6,750
vi=iv+v	Annual operating cash flow	$        9,948	$      11,177	$      11,001	$      9,363
vii=i+iii+vi	Incremental cash flow	$     (27,335)	$      10,048	$      11,117	$      11,111	$      9,548
Ans 3
	Particular	Year 0	Year 1	Year 2	Year 3	Year 4
	Incremental cash flow	$     (27,335)	$      10,048	$      11,117	$      11,111	$      9,548
	PVIF @ 11%	1	0.9009009	0.81162243	0.73119138	0.658731
	Present value	$     (27,335)	$        9,052	$        9,022	$        8,124	$      6,290	$   5,153
	NPV =	$         5,153