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 40 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 $ 26,000 Sales revenue $ 13,500 $ 14,000 $ 14,500 $ 11,500 Operating costs 2,900 3,000 3,100 2,300 Depreciation 6,500 6,500 6,500 6,500 Net working capital spending 320 370 420 320 ? 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 11 percent. What is the NPV of the project?

Explanation / Answer

a) Incremental net income

Sales

(-) Operating Costs

(-) Depreciation

13500

2900

6500

14000

3000

6500

14500

3100

6500

11500

2300

6500

Income before tax

(-) Tax @ 40 %

4100

1640

4500

1800

4900

1960

2700

1080

b)   Incremental Cash flow

Net income

(+) Depreciation

2460

6500

2700

6500

2940

6500

1620

6500

Cash flow from operation

Addition to net working capital

Investment

(-) 320

(-) 26000

8960

(-)370

9200

(-)420

9440

(-)320

8120

1430

c) NPV = P.V. of cash inflow - P. V of cash outflow

P.V. of cash inflow = 8590 * P.V. factor for first year @ 11 % +  8780 * P.V. factor for second year @ 11 % +  9120 * P.V. factor for third year @ 11 % +  9550 * P.V. factor for fourthyear @ 11 %

   = 8590 * 0.9009 + 8780 * 0.8116 + 9120 * 0.7312 + 9550 * 0.6587

   = $ 27823.71 (approx)

P.V. of cash outflow = $ 26320

NPV of project = 27823.71 - 26320 = $ 1503. 71 (approx)

Conclusion:- NPV of Project = $ 1503.71 (approx)

Particulars Year 1 Year 2 Year 3 Year 4

Sales

(-) Operating Costs

(-) Depreciation

13500

2900

6500

14000

3000

6500

14500

3100

6500

11500

2300

6500

Income before tax

(-) Tax @ 40 %

4100

1640

4500

1800

4900

1960

2700

1080

Incremental net income 2460 2700 2940 1620

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