Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 38 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 1 Year 2 Year 3 Year 4 Year 0 $39.000 Investment Sales revenue Operating costs Depreciation Net working capital spending $ 20.000 $ 20.500 $ 21.000 $ 18,000 4,200 4,300 4.400 3.600 9.750 9.750 9.750 9.750 500 550 450 ? 450 a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) Year 1 Year 2 Year 3 Year 4 Net income b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) Year 0 Year 1 Year 4 Cash flow c. Suppose the appropriate discount rate is 12 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

	Year 0	Year 1	Year 2	Year 3	Year 4
Investment	(39,000.00)
Working capital spending	(450.00)	(500.00)	(550.00)	(450.00)
Sales Revenue		20,000.00	20,500.00	21,000.00	18,000.00
Operating Costs		4,200.00	4,300.00	4,400.00	3,600.00
Depreciation		9,750.00	9,750.00	9,750.00	9,750.00
Income before tax		6,050.00	6,450.00	6,850.00	4,650.00
Taxes		2,299.00	2,451.00	2,603.00	1,767.00
Net Income		3,751.00	3,999.00	4,247.00	2,883.00
Recovery of Working capital					1,950.00
Add: Depreciation (non-cash expense)		9,750.00	9,750.00	9,750.00	9,750.00
Cash Flow	(39,450.00)	13,001.00	13,199.00	13,547.00	14,583.00
Discount factor	1.00000	0.89286	0.79719	0.71178	0.63552
PV of cash flows	(39,450.00)	11,608.04	10,522.16	9,642.49	9,267.76
NPV	1,590.44

B 1 u 2 Investment 3 Working capital spending 4 Sales Revenue 5 Operating costs 6 Depreciation 7 Income before tax 8 Taxes 9 Net Income 10 Recovery of Working capital 11 Add: Depreciation (non-cash expense) 12 Cash Flow 13 Discount factor 14 PV of cash flows 15 NPV Year 0 Year 1 Year 2 Year 3 Year 4 -39000 -450 -500 -550 -450 20000 20500 21000 18000 4200 4300 4400 3600 9750 9750 9750 9750 =C4-C5-C6 =D4-D5-D6 =E4-E5-E6 =F4-F5-F6 =C7*38% =D7*38% =E7*38% =F7*38% =C7-C8 =D7-D8 =E7-E8 =F7-F8 =450+500+550+450 =C6 =D6 =E6 =F6 =SUM(B2:B11) =C9+C11+C10+C3 =D9+D11+D10+D3 =E9+E11+E10+E3 =F9+F11+F10+F3 =B13/1.12 =C13/1.12 =D13/1.12 =E13/1.12 =B12*B13 =C12*C13 =D12*D13 =E12E13 =F12*F13 =SUM(B14:F14)