The Dante Manufacturing Company is considering a new investment. Financial proje
ID: 2744547 • Letter: T
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
a)
Incremental Net income
Particulars
Year 1
Year 2
Year 3
Year 4
Sales Revenue
20,000
20,500
21,000
18,000
Operating Cost
(4,200)
(4,300)
(4,400)
(3,600)
Depreciation
(9,750)
(9,750)
(9,750)
(9,750)
Income before taxes
6,050
6,450
6,850
4,650
Income tax @ 38%
(2,299)
(2,451)
(2,603)
(1,767)
Net income
3,751
3,999
4,247
2,883
b)
Incremental cashflow investment
Particulars
year0
Year 1
Year 2
Year 3
Year 4
Net income
3,751
3,999
4,247
2,883
Depreciation
9,750
9,750
9,750
9,750
OCF
13,501
13,749
13,997
12,633
Invesment
(39,000)
Addition to NWC
(450)
(500)
(550)
(450)
1,950
Incremental Cashflow
(39,450)
13,001
13,199
13,547
14,583
c)
Discount rate
12%
Particulars
year0
Year 1
Year 2
Year 3
Year 4
Cashflow
(39,450.00)
13,001.00
13,199.00
13,547.00
14,583.00
PV Factor @ 12%
1.0000
0.8929
0.7972
0.7118
0.6355
PV
(39,450.00)
11,608.04
10,522.16
9,642.49
9,267.76
NPV
1,590.44
Incremental Net income
Particulars
Year 1
Year 2
Year 3
Year 4
Sales Revenue
20,000
20,500
21,000
18,000
Operating Cost
(4,200)
(4,300)
(4,400)
(3,600)
Depreciation
(9,750)
(9,750)
(9,750)
(9,750)
Income before taxes
6,050
6,450
6,850
4,650
Income tax @ 38%
(2,299)
(2,451)
(2,603)
(1,767)
Net income
3,751
3,999
4,247
2,883
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