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.)

	Year1	Year 2	Year3	Year 4
Net Income

    

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.)

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

  

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.)

  NPV=  

Answer 1

a.

	Year 1	Year 2	Year 3	Year 4
Net Income	$ 3,198	$ 4,426.50	$ 4,251	$ 2,613

b.

	Year 0	Year 1	Year 2	Year 3	Year 4
Cash flows	$ (27,335)	$ 9,713	$ 10,881.50	$ 10,816	$ 10,413

c. NPV of the project: $ 5,014.57

	Year 0	Year 1	Year 2	Year 3	Year 4
Cash flows	$ ( 27,335)	$ 9,713	$ 10,881.50	$ 10,816	$ 10,413
PV factor at 11 %	1.0000	0.9009	0.8116	0.7312	0.6587
Present values	(27,335)	8,750.44	8,831.43	7,908.66	6,859.04
Net Present Value	$ 5,014.57