The Best Manufacturing Company is considering a new investment. Financial projec

Question

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. 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. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) Suppose the appropriate discount rate is 12 percent. What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places, (e.g., 32.16)) NPV $

Explanation / Answer

b. Cash flow

c. NPV = -28340 + 9514/(1.12)1 + 9728/(1.12)2 + 10092/(1.12)3 + 10490/(1.12)4

= $1759.62

Year 0 1 2 3 4 Initital investment -28000 Net working capital spending -340 -390 -440 -340 Net Income 2904 3168 3432 1980 Depreciation 7000 7000 7000 7000 Reversal of Net working capital 1510 Cash flows -28340 9514 9728 10092 10490

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