Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 31 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 workingcapital is recovered at the end of the project.

Year 0 Year 1 Year 2 Year 3 Year 4
Investment $ 18,100
Sales revenue $9,100 $9,700 $9,600 $7,100
Operating costs 1,200 1,800 1,700 1,600
Depreciation 4,525 4,525 4,525 4,525

Net working capital spending
180 230 280 180 ?

Requirement 1:
Compute the incremental net income of the investment for each year.
Net income
Year 1 $
Year 2 $
Year 3 $
Year 4 $

Requirement 2:
Compute the incremental cash flows of the investment for each year. (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign.)

Incremental cash flow
Year 0 $
Year 1 $
Year 2 $
Year 3 $
Year 4 $

Requirement 3:
Suppose the appropriate discount rate is 11 percent. What is the NPV of the project? Negative amount should be indicated by a minus sign. Round your answer to 2decimal places. (e.g., 32.16))

NPV $

Answer 1

Cash flow items are:
1) investment
2) change in working capital
3) add back depreciation profit after tax

So, for year 0, we have -10,000, the initial investment.

For year 1, we have sales of 7,000, minus operating costs of 2,000 yielding profit before tax of 5,000. Taxing that at 34% yields profit after tax of3,300. Add back the depreciation of 2,500, and the change in W/C of 200, we get total cash flow in year 1 of 6,000.

For year 2, we have profit after tax of 3300, add back depreciation of 2500 and change in W/C of 50, totaling 5850.

For year 3, we have same as year 2, totaling 5850

For year 4, we have profit after tax of 3300, add back depreciation of 2500 and change in W/C of -100, totaling 5700.

Remembering your PV discount factors for 12% IRR, and that all cash flows are at end of year, we have:
year 0 = 0.8928
year 1 = 0.7972
year 2 = 0.7118
year 3 = 0.6355
year 4 = 0.5674

Multiplying each discount factor with each year's total cash flow and then adding them all up will give you the NPV = $6,971

Since this is all in thousands, the NPV is $6.97MM