Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 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	$	37,000
Sales revenue			$	19,000	$	19,500	$	20,000	$	17,000
Operating costs				4,000		4,100		4,200		3,400
Depreciation				9,250		9,250		9,250		9,250
Net working capital spending		430		480		530		430		?

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. Negative amounts 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 final answer to 2 decimal places. (e.g., 32.16))

NPV

$

Answer 1

a]

net income = (sales - costs - depreciation) * (1 - tax rate)

b]

cash flow in year 0 = -(investment + NWC spending)

cash flow in years 1 to 4 = net income + depreciation - NWC spending

NWC spending in year 4 = -(total NWC spending of years 0 to 3)

c]

NPV = sum of present values of cash inflows - initial investment

NPV is calculated using NPV function in Excel

NPV is $1,174.75