Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 21 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	$	27,400
Sales revenue			$	14,500	$	16,100	$	17,500	$	14,000
Operating costs				3,450		3,375		5,300		3,900
Depreciation				6,850		6,850		6,850		6,850
Net working capital spending		355		255		335		205		?

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

Deprecia tion Year Revenue Costs 1 1 $ 14,500 2 $ 16,100 3 $ 17,500 4 $ 14,000 $ 3,450 $ 6,850 $ 3,375 $ 6,850 $ 5,300 $ 6,850 $ 3,900 $ 6,850 Net Depreciat After-tax Working Net After-Tax PVIF@ PBT Tax@21% income ion OCF capital Investment cash flow 11% Present value $ (355) $ (27,400) $ (27,755.00) 1.000 $ (27,755.00) $4,200 $ 882 $ 3,318 $ 6,850 $ 10,168 $ (255)| $ 9,913.00 0.901 $ 8,930.63 $ 5,875 $ 1,234 $ 4,641 $ 6,850 $ 11,491 $ (335) 11,156.25 0.812 $ 9,054.66 $ 5,350 $ 1,124 $ 4,227 $ 6,850 $ 11,077 $ (205) $ 10,871.50 0.731 $ 7,949.15 $ 3,250 $ 683 $ 2,568 $ 6,850 $ 9,418 $ 1,150 - $ 10,567.50 0.659 $ 6,961.14 Net present value $ 5,140.58 Net Income Year 1 $ Net Income Year 2 $ Net Income Year 3 $ Net Income Year 4 $ Cash Flow Year O Cash Flow Year 1 $ Cash Flow Year 2 $ Cash Flow Year 3 $ Cash Flow Year 4 $ NPV $ 3,318 4,641 4,227 2,568 $27,755 9,913 11,156 10,872 10,568 5,140.58

*Please rate Thumbs up