Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 24 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	$	27,200
Sales revenue			$	14,300	$	15,900	$	17,300	$	13,800
Operating costs				3,350		3,325		5,100		3,700
Depreciation				6,800		6,800		6,800		6,800
Net working capital spending		345		245		315		195		?

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 9 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

Answer a
Computation of incremental net income of the investment for each year
Year	1	2	3	4
Sales revenue	$14,300.00	$15,900.00	$17,300.00	$13,800.00
Less : Operating Costs	$3,350.00	$3,325.00	$5,100.00	$3,700.00
Less : Depreciation	$6,800.00	$6,800.00	$6,800.00	$6,800.00
Net Operating Income	$4,150.00	$5,775.00	$5,400.00	$3,300.00
Less : Taxes @ 24%	$996.00	$1,386.00	$1,296.00	$792.00
Incremental net Income	$3,154.00	$4,389.00	$4,104.00	$2,508.00
Answer b
Computation of incremental cash flows of the investment for each year
Year	0	1	2	3	4
Investment	-$27,200.00
Net working capital spending	-$345.00	-$245.00	-$315.00	-$195.00
Incremental net income		$3,154.00	$4,389.00	$4,104.00	$2,508.00
Depreciation		$6,800.00	$6,800.00	$6,800.00	$6,800.00
Recovery of working capital					$1,100.00
Incremental cash flows	-$27,545.00	$9,709.00	$10,874.00	$10,709.00	$10,408.00
Answer c
Computation of NPV of project
Year	0	1	2	3	4	NPV
Incremental cash flows	-$27,545.00	$9,709.00	$10,874.00	$10,709.00	$10,408.00
x Discount Factor @ 9%	1	0.9174312	0.84168	0.7721835	0.7084252
Present Values	-$27,545.00	$8,907.34	$9,152.43	$8,269.31	$7,373.29	$6,157.37
NPV of project =	$6,157.37