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 $ 28,000 Sales revenue Operating costs Depreciation Net working capital spending $ 15,100 $ 16,700 $ 18,100 $ 14,600 3,750 3,525 5,900 4,500 7,000 7,000 7,000 7,000 2 85 395 235 ? 385 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

Answer 1

rate positively ..

		Given that-
			Year 0	Year 1	Year 2	Year 3	Year 4
		Investment	28000
		Sales revenue		15100	16700	18100	14600
		Operating cost		3750	3525	5900	4500
		Depreciation		7000	7000	7000	7000
		Net working capital	385	285	395	235
ans a)		Computation of net income
			Year 1	Year 2	Year 3	Year 4
		Sales revenue	15100	16700	18100	14600
		Operating cost	3750	3525	5900	4500
		Depreciation	7000	7000	7000	7000
		Profit before tax	4350	6175	5200	3100
		Tax @ 22%	957	1358.5	1144	682
	ans =	Net income	3393	4816.5	4056	2418
ans b)	Incremental cash flow
			Year 0	Year 1	Year 2	Year 3	Year 4
	i	Investment	28000
	ii	Net working capital	385	285	395	235	-1300
	iii	Net income		3393	4816.5	4056	2418
	iv	Depreciation		7000	7000	7000	7000
	v=iv+iii	Operating cash flow	10393	11816.5	11056	9418
	vi=v-i-ii	Net cash flow	-28385	10108	11421.5	10821	10718
ans c)	Computation of NPV
			Year 0	Year 1	Year 2	Year 3	Year 4
		Net cash flow	-28385	10108	11421.5	10821	10718
		PVIF @ 9%	1	0.917431	0.84168	0.772183	0.708425
		present value	(28,385.00)	9,273.39	9,613.25	8,355.80	7,592.90	6,450.34
		NPV =	6,450.34