Question

Greenpoint Corporation is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 25 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. Suppose the appropriate discount rate is 12 percent. Determine the net working capital spending for Year 4 then calculate the NPV of the project. What is the project NPV?

	Year 0	Year 1	Year 2	Year 3	Year 4
Investment	$118,000
Sales revenue		$75,000	$75,800	$77,000	$78,500
Operating cost		18,000	18,600	19,600	21,000
Depreciation		29,500	29,500	29,500	29,500
Net working capital spending	10,000	4,000	2,000	1,000	?

		$30,532.66
		$29,744.78
		$28,568.41
		$27,520.33
		$26,244.80

Answer 1

			Year1	Year2	YEar3	YEar4
Sales revenue			75000	75800	77000	78500
Less: Operating cost			18000	18600	19600	21000
Less: Ddepreciation			29500	29500	29500	29500
Net Income before tax			27500	27700	27900	28000
Less: Tax @ 25%			6875	6925	6975	7000
After tax Income			20625	20775	20925	21000
Add: Depreciation			29500	29500	29500	29500
Annual cash flows			50125	50275	50425	50500
NPV:			YEar0	Year1	Year2	YEar3	YEar4
Investment			-118000
WC investment			-10000	-4000	-2000	-1000	17000
Annual cashflows				50125	50275	50425	50500
Net cash flows			-128000	46125	48275	49425	67500
PVF at 12%			1	0.892857	0.797194	0.71178	0.635518
Present value of cashflows			-128000	41183.04	38484.53	35179.74	42897.47
NPV			29744.78
Answer is $ 29744.78