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 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. 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

Time line(t) 0 1 2 3 4 Investment -39000 Sales revenue 20000 20500 21000 18000 Operating cost -4200 -4300 -4400 -3600 Depreciation 9750 9750 9750 9750 Net working capital spending -450 -500 -550 -450 a.Incremental net income Time line 0 1 2 3 4 Sales revenue 20000 20500 21000 18000 -Operating cost -4200 -4300 -4400 -3600 -Depreciation 9750 9750 9750 9750 =PBT 6050 6450 6850 4650 -taxes =PBT*tax rate 2299 2451 2603 1767 =Net income 3751 3999 4247 2883 b. Incremental cash flows Time line 0 1 2 3 4 Investment -39000 Sales revenue 20000 20500 21000 18000 -Operating cost -4200 -4300 -4400 -3600 -Depreciation 9750 9750 9750 9750 =PBT 6050 6450 6850 4650 -taxes =PBT*tax rate 2299 2451 2603 1767 =Net income 3751 3999 4247 2883 +depreciation 9750 9750 9750 9750 -Net working capital spending -450 -500 -550 -450 1950 =Incremental cash flows(k) -39450 13001 13199 13547 14583 Discount rate = 12%(r) 1.12 Discounted value of each year cash flow = k/(1+r)^t -39450 11608.04 10522.16 9642.487 9267.76 c)NPV = some of discounted cash flows = 1590.444859

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