The Best Manufacturing Company is considering a new investment. Financial projec
ID: 2761841 • Letter: T
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.
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 11 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))
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.
Explanation / Answer
Year
0
1
2
3
4
Sales
$16,000.00
$16,500.00
$17,000.00
$14,000.00
Less: Costs
$3,400.00
$3,500.00
$3,600.00
$2,800.00
Less: Depreciation
$7,750.00
$7,750.00
$7,750.00
$7,750.00
EBIT
$4,850.00
$5,250.00
$5,650.00
$3,450.00
Less: Tax @ 40%
$1,940.00
$2,100.00
$2,260.00
$1,380.00
Net Incremental Income
$2,910.00
$3,150.00
$3,390.00
$2,070.00
OCF
$0.00
$10,660.00
$10,900.00
$11,140.00
$9,820.00
Capital Spending
-$31,000.00
$0
$0
$0
$0
NWC
-$370.00
-$420.00
-$470.00
-$370.00
$1,630.00
Incremental Cash Flow
-$31,370.00
$10,240.00
$10,430.00
$10,770.00
$11,450.00
Formulas used:
OCF = Net Incremental Income + Depreciation
Incremental Cash Flow = OCF + Capital Spending + NWC
NPV = -$31,370 + {$10,240/(1+.11)1} + {$10,430/(1+.11)2} + {$10,770/(1+.11)3} + {$11,450/(1+.11)4}
=$1,737.85
Year
0
1
2
3
4
Sales
$16,000.00
$16,500.00
$17,000.00
$14,000.00
Less: Costs
$3,400.00
$3,500.00
$3,600.00
$2,800.00
Less: Depreciation
$7,750.00
$7,750.00
$7,750.00
$7,750.00
EBIT
$4,850.00
$5,250.00
$5,650.00
$3,450.00
Less: Tax @ 40%
$1,940.00
$2,100.00
$2,260.00
$1,380.00
Net Incremental Income
$2,910.00
$3,150.00
$3,390.00
$2,070.00
OCF
$0.00
$10,660.00
$10,900.00
$11,140.00
$9,820.00
Capital Spending
-$31,000.00
$0
$0
$0
$0
NWC
-$370.00
-$420.00
-$470.00
-$370.00
$1,630.00
Incremental Cash Flow
-$31,370.00
$10,240.00
$10,430.00
$10,770.00
$11,450.00
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