Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 21 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	$	26,900
Sales revenue			$	14,000	$	15,600	$	17,000	$	13,500
Operating costs				3,200		3,250		4,800		3,400
Depreciation				6,725		6,725		6,725		6,725
Net working capital spending		330		230		285		180		?

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 10 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

Req a:
Incremental Net income:
			Year1	Year2	Year3	Year4
Sales revenue			14000	15600	17000	13500
Less: Cost
Operating cost			3200	3250	4800	3400
Depreciation			6725	6725	6725	6725
Net income before tax			4075	5625	5475	3375
Less: Tax @ 21%			855.75	1181.25	1149.75	708.75
After taxx income			3219.25	4443.75	4325.25	2666.25
Req b:
			Year0	Year1	Year2	Year3	YEar4
After tax income				3219.25	4443.75	4325.25	2666.25
Add: Depreciation				6725	6725	6725	6725
Cashflows from operations				9944.25	11168.75	11050.25	9391.25
Initial investment			-26900
Working capital changes			-330	-230	-285	-180	1025
Net cash flows			-27230	9714.25	10883.75	11230.25	10416.25
Req c:
			Year0	Year1	Year2	Year3	YEar4
Net cash flows			-27230	9714.25	10883.75	11230.25	10416.25
PVF at 10%			1	0.909091	0.826446	0.75131	0.68301
Present value of cashflows			-27230	8831.136	8994.835	8437.45	7114.44
NPV			6147.86