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 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. (Do not round intermediate calculations.) Year 1 Year 2 Year 3 Year 4 Net income $ $ $ $ b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) Year 0 Year 1 Year 2 Year 3 Year 4 Cash flow $ $ $ $ $ c. Suppose the appropriate discount rate is 11 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Explanation / Answer

a. Incremental net income:

b. Incremental cash flows:

c. NPV at discount rate of 11% = $ 8,910 x 0.9009 + 9,150 x 0.8116 + 9,540 x 0.7312 + 8,440 x 0.6587 - 26,320 = $ 8,027.02 + $ 7,426.14 + $ 6,975.65 + $ 5,559.43 - $ 26,320 = $ 1,668.24

Year 1 2 3 4 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 Earnings before tax 4,100 4,500 4,900 2,700 Incremental net income ( Earnings before tax x ( 1-0.4) 2,460 2,700 2,940 1,620

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.