Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 22 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 $ 27,000 Sales revenue $ 14,100 $ 15,700 $ 17,100 $ 13,600 Operating costs 3,250 3,275 4,900 3,500 Depreciation 6,750 6,750 6,750 6,750 Net working capital spending 335 235 295 185 ? 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 11 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.) Calculation of Incremental Net Income of Investment for each year :

	Year 0	Year 1	Year 2	Year 3	Year 4
Annual Sales Revenue		14100	15700	17100	13600
Cash Operating Cost		3250	3275	4900	3500
Less : Depreciation (Given)		6750	6750	6750	6750
Earning before taxes		4100	5675	5450	3350
Taxes @ 22%		-902	-1248.5	-1199	-737
Net Income / Earnings After Taxes		3198	4426.5	4251	2613

(b.) Computation of incremental cash flows of the investment for each year.

	Year 0	Year 1	Year 2	Year 3	Year 4
Initial Investment	-27000
Net Income / Earnings After Taxes		3198	4426.5	4251	2613
Add : Depreciation		6750	6750	6750	6750
Net Working Capital (NWC) Spending	-335	-235	-295	-185	0
Plus : Recapture of NWC					1050
Operating Cash Flows	-27335	9713	10881.5	10816	10413

(c.) Calculation of Net Present Value

	Year 0	Year 1	Year 2	Year 3	Year 4
Initial Investment	27000
Annual Sales Revenue		14100	15700	17100	13600
Cash Operating Cost		3250	3275	4900	3500
Less : Depreciation (Given)		6750	6750	6750	6750
Earning before taxes		4100	5675	5450	3350
Taxes @ 22%		-902	-1248.5	-1199	-737
Earnings After Taxes / Net Income		3198	4426.5	4251	2613
Add : Depreciation		6750	6750	6750	6750
Net Working Capital (NWC) Spending	335	235	295	185	0
Plus : Recapture of NWC					1050
Operating Cash Flows	27335	9713	10881.5	10816	10413
PV Factor @ 11%	1	0.900901	0.811622	0.731191	0.658731
PV of Net Cash flows (Inflow)		8750.45	8831.67	7908.566	6859.366
PV of Net Cash flows (Outflow)	27335
The net present value (NPV) of this project is		= $ 5015.05157 or $ 5015.05
NPV = PV of cash inflow - PV of cash outflow
= 32350.05157- 27335
= $ 5015.05157 or $ 5015.05