Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax is 21 percent. Assume all sales revenue is 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.  

Investment $27,400

Sales Revenue- Year 1: 14,500 Year 2:16,100 Year 3: 17,500 Year 4: 14,000

Operating Costs Year1: 3,450 Year 2: 3,375 Year 3 5,300 Year 4: 3,900

Depreciation Year 1: 6850 Year 2: 6850 Year 3: 6850 Year 4: 6850

Net working Capital spending Year Zero 355- Year 1 255 Year 2 335 Year 3 205 Year 4 ?

Compute the incremental net income of the investment for each year?

Compute the incremental cash flows of the investment for each year?

Suppose the appropriate discount is 11%. What is the NPV of the Project?

Answer 1

Statement showing incremental net profit

Particulars	1	2	3	4
Sales revenue	14500	16100	17500	14000
Less: Operating cost	3450	3375	5300	3900
Les : Depreciation	6850	6850	6850	6850
PBT	4200.00	5875.00	5350.00	3250.00
Tax @ 21%	882.00	1233.75	1123.50	682.50
PAT	3318.00	4641.25	4226.50	2567.50

Statement showing incremental Cash flow

Particulars	0	1	2	3	4
PAT		3318.00	4641.25	4226.50	2567.50
Add: Depreciation		6850	6850	6850	6850
Annual cash flow		10168.00	11491.25	11076.50	9417.50
Change in WC	-355	-255.00	-335.00	-205.00	1150.00
Investment	-27400
Total incremental cash flow	-27755	9913.00	11156.25	10871.50	10567.50

WC of year 4 will be total of cash block in year 0 to year 3

Statement showing NPV

Particulars	0	1	2	3	4	NPV = sum of PV
Total incremental cash flow	-27755	9913.00	11156.25	10871.50	10567.50
PVIF @ 11%	1.0000	0.9009	0.8116	0.7312	0.6587
PV	-27755.00	8930.63	9054.66	7949.15	6961.14	5140.58