Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 23 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 $ 27,100 Sales revenue $ 14,200 $ 15,800 $ 17,200 $ 13,700 Operating costs 3,300 3,300 5,000 3,600 Depreciation 6,775 6,775 6,775 6,775 Net working capital spending 340 240 305 190 ? 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 12 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.)

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 23 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 1 Year 2 Year 3 Year 4 Year 0 $ 27,100 Investment Sales revenue Operating costs Depreciation Net working capital spending $ 14,200 $ 15,800 $ 17,200 $ 13.700 3,300 3,300 5,000 3,600 6,775 6,775 6,775 6,775 240 305 190 ? 340 a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) Answer is complete but not entirely correct. Year 1 3,167 Ⓡ$ Year 2 11,501 $ Year 3 10,981 X $ Year 4 9,364 % Net income $ 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.) Year Year 1 Year 2 Year 3 Year 4

Answer 1

a]		0	1	2	3	4
	Sales		$    14,200.00	$    15,800.00	$      17,200.00	$   13,700.00
	Operating costs		$      3,300.00	$      3,300.00	$         5,000.00	$     3,600.00
	Depreciation		$      6,775.00	$      6,775.00	$         6,775.00	$     6,775.00
	Net operating income		$      4,125.00	$      5,725.00	$         5,425.00	$     3,325.00
	Tax at 23%		$          948.75	$      1,316.75	$         1,247.75	$        764.75
	Incremental net income		$      3,176.25	$      4,408.25	$         4,177.25	$   2,560.25
b]	Incremental net income		$      3,176.25	$      4,408.25	$         4,177.25	$     2,560.25
	Add: Depreciation		$      6,775.00	$      6,775.00	$         6,775.00	$     6,775.00
	Less: Capital expenditure	$     27,100.00
	Less: Change in NWC	$        340.00	$          240.00	$          305.00	$            190.00	$    -1,075.00
	Incremental cash flows of the investment	$ -27,440.00	$    9,711.25	$   10,878.25	$     10,762.25	$ 10,410.25
c]	PVIF at 12% [PVIF = 1/1.12^t]	1	0.89286	0.79719	0.71178	0.63552
	PV of cash flows at 12% [Incremental cash flows*PVIF)	$   -27,440.00	$      8,670.76	$      8,672.07	$         7,660.36	$     6,615.90
	NPV [Sum of PV of cash flows]	$       4,179.09