Question

Problem 8-2 Calculating Project NPV

The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 35 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	$	32,000
Sales revenue			$	16,500	$	17,000	$	17,500	$	14,500
Operating costs				3,500		3,600		3,700		2,900
Depreciation				8,000		8,000		8,000		8,000
Net working capital spending		380		430		480		380		?

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 0	Year 1	Year 2	Year 3	Year 4
Cash flow	$	$	$	$	$

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           $

Answer 1

Particulars	Year 1	Year 2	Year 3	Year 4
Sales Revenue	16,500.00	17,000.00	17,500.00	14,500.00
Less Operating Costs	(3,500.00)	(3,600.00)	(3,700.00)	(2,900.00)
Less depreciation	(8,000.00)	(8,000.00)	(8,000.00)	(8,000.00)
Income before tax	5,000.00	5,400.00	5,800.00	3,600.00
Tax at 35%	(1,750.00)	(1,890.00)	(2,030.00)	(1,260.00)
a) Income after Tax or Net income	3,250.00	3,510.00	3,770.00	2,340.00
Particulars	Year 0	Year 1	Year 2	Year 3	Year 4
Net Income		3,250.00	3,510.00	3,770.00	2,340.00
Add Depreciation		8,000.00	8,000.00	8,000.00	8,000.00
Cash flows after tax		11,250.00	11,510.00	11,770.00	10,340.00
Net working capital spending	(380.00)	(430.00)	(480.00)	(380.00)	1,670.00
Initial investment	(32,000.00)
b) incremental cash flows	(32,380.00)	10,820.00	11,030.00	11,390.00	12,010.00
PVF	1.00	0.8929	0.7972	0.7118	0.6355	NPV
PV of cash Flows	(32,380.00)	9,660.71	8,793.05	8,107.18	7,632.57	1,813.51
NPV	1,813.51