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 0		Year 1		Year 2		Year 3		Year 4
Investment	$	35,000
Sales revenue			$	18,000	$	18,500	$	19,000	$	16,000
Operating costs				3,800		3,900		4,000		3,200
Depreciation				8,750		8,750		8,750		8,750
Net working capital spending		410		460		510		410		?

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 2	Year 3	Year 4
Cash flow	$	$	$	$	$

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.)

NPV

$

Answer 1

a.
Calculation of incremental net income of investment for each year is shown below
	Year 1	Year 2	Year 3	Year 4
Sales revenue	$18,000	$18,500	$19,000	$16,000
Less: Operating costs	$3,800	$3,900	$4,000	$3,200
Less: Depreciation	$8,750	$8,750	$8,750	$8,750
Income before taxes	$5,450	$5,850	$6,250	$4,050
Less: Taxes @ 38%	$2,071	$2,223	$2,375	$1,539
Net income	$3,379	$3,627	$3,875	$2,511
b.
Calculation of incremental cash flow of investment for each year is shown below
	Year 0	Year 1	Year 2	Year 3	Year 4
Net income	$0	$3,379	$3,627	$3,875	$2,511
Add: Depreciation		$8,750	$8,750	$8,750	$8,750
Operating cash flow		$12,129	$12,377	$12,625	$11,261
Addition to NWC	-$410	-$460	-$510	-$410	$1,790
Investment	-$35,000
Incremental cash flow	-$35,410	$11,669	$11,867	$12,215	$13,051
c.
Calculation of NPV is shown below
	Year 0	Year 1	Year 2	Year 3	Year 4
Incremental cash flow	-$35,410	$11,669	$11,867	$12,215	$13,051
Discount factor @ 11%	1	0.9009009	0.8116224	0.7311914	0.658731
	1/(1.11^0)	1/(1.11^1)	1/(1.11^2)	1/(1.11^3)	1/(1.11^4)
Present value	-$35,410.00	$10,512.61	$9,631.52	$8,931.50	$8,597.10
Net present value	$2,262.74