Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34%. 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 $40,000
Sales revenue $20,500 $21,000 $21,500 $18,500
Operating costs 4,300 4,400 4,500 3,700
Depreciation 10,000 10,000 10,000 10,000
Change in NWC 460 510 560 460 ?
Change in NWC in year 4 will be sum of all the NWC needed in year 0-3.
A. Compute the incremental net income of the investment for each year. Do not 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. Negative amounts should be indicated by a minus sign.
Year 0 Year 1 Year 2 Year 3 Year 4
Cash Flow $ $ $ $ $
C. Suppose the appropriate discount rate is 12%. What is the NPV of the project? Do not Round intermediate calculations and round your final answer to 2 decimal places.
NPV $____

Answer 1

The Best Manufacturing Company

A. Incremental Net Income:

Year 0 Year 1 Year 2 Year 3 Year 4

Sales revenue $20,500 $21,000 $21,500 $18,500

Operating costs 4,300 4,400 4,500 3,700

Depreciation 10,000 10,000 10,000 10,000

Net Income 6,200 6,600 7,000 4,800

Incremental NI 6,200 400 300 -3,200

B. Incremental cash flows:

Investment -$40,000

Sales revenue $20,500 $21,000 $21,500 $18,500

Operating costs -4,300 -4,400 -4,500 -3,700

Change in NWC -460 -510 -560 -460 1,990

Net Cash flows -24,260 $16,090 $16,440 $14,340 1,990

Incremental

cash flows -$24,260 $8,170 $350 -$2,100 -$12,440

C. NPV = $14,686.77

Step-by-step explanation:

a) Data and Calculations:

Corporate tax rate = 34%

Year 0 Year 1 Year 2 Year 3 Year 4

Investment $40,000

Sales revenue $20,500 $21,000 $21,500 $18,500

Operating costs 4,300 4,400 4,500 3,700

Depreciation 10,000 10,000 10,000 10,000

Net Income 6,200 6,600 7,000 4,800

Incremental NI 6,200 400 300 -3,200

Incremental cash flows:

Investment -$40,000

Sales revenue $20,500 $21,000 $21,500 $18,500

Operating costs -4,300 -4,400 -4,500 -3,700

Change in NWC -460 -510 -560 -460 1,990

Net Cash flows -24,260 $16,090 $16,440 $14,340 1,990

Incremental

cash flows -$24,260 $8,170 $350 -$2,100 -$12,440

Net Present Value of the project:

Net Cash flows Discount PV

Factor

Year 0 -24,260 1 -$24,260.00

Year 1 16,090 0.893 14,368.37

Year 2 16,440 0.797 13,102.68

Year 3 14,340 0.712 10,210.08

Year 4 1,990 0.636 1,265.64

NPV $14,686.77