Question

1. Calculating Project NPV The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 34 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	$31,000	–	–	–	–
Sales revenue	–	$14,200	$15,900	$15,700	$12,900
Operating costs	–	2,100	2,100	2,100	2,100
Depreciation	–	7,750	7,750	7,750	7,750
Net working capital spending	450	175	250	275	?

1. Compute the incremental net income of the investment for each year.

2. Compute the incremental cash flows of the investment for each year.

3. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?

Answer 1

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