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 38 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).)

Year 0 Year 1 Year 2 Year 3 Year 4   Investment $ 39,000   Sales revenue $ 20,000 $ 20,500 $ 21,000 $ 18,000   Operating costs 4,200 4,300 4,400 3,600   Depreciation 9,750 9,750 9,750 9,750   Net working capital spending 450 500 550 450 ?

Explanation / Answer

Incremental net income = Sales revenue - Operating costs - Depreciation x ( 1 - T)

a. Incremental net income:

b. Incremental cash flows: Net income + Depreciation - / + working capital needed / released

c. NPV at discount rate of 12%.

Present value of cash inflows = 13,451 x 0.8929 + 13,699 x 0.7972 + 14,097 x 0.7118 + 13,083 x 0.6355 = 12,010.40 + 10,920.84 + 10,034.24 + 8,314.25 = $ 41,279.73

NPV = Present value of cash inflows - Initial investment = $ 41,279.73 - $ 39,450 = $ 1,829.73

Year 1 2 3 4 Net income $ 3,751 $ 3,999 $ 4,247 $ 2,883

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