The Dante Manufacturing Company is considering a new investment. Financial proje

Question

The Dante Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 35 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.

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

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

Suppose the appropriate discount rate is 13 percent. What is the NPV of the project?

Year 0 Year 1 Year 2 Year 3 Year 4   Investment $ 38,000   Sales revenue $ 19,500 $ 20,000 $ 20,500 $ 17,500   Operating costs 4,100 4,200 4,300 3,500   Depreciation 9,500 9,500 9,500 9,500   Net working capital spending 440 490 540 440 ?

Explanation / Answer

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

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

c. Suppose the appropriate discount rate is 13 percent. What is the NPV of the project?

NPV = -38440 + 13285/1.13 + 13545/1.13^2 + 13955/1.13^3 + 12865/1.13^4

NPV = $ 1486.22

Working

Year 1 Year 2 Year 3 Year 4 Net income 3835 4095 4355 2925

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