The Best Manufacturing Company is considering a new investment. Financial projec
ID: 2774420 • 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.
Suppose the appropriate discount rate is 11 percent. What is the NPV of the project?
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
Answer:
a) incremental net income of the investment for each year = Row G
b) incremental cash flows net of working capital investments and recapture = Row L
c) NPV of the project = $2,478
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 A Initial Investment -43,000 B Sales revenue 22,000 22,500 23,000 20,000 C Operating costs 4,600 4,700 4,800 4,000 D Depreciation 10,750 10,750 10,750 10,750 E Incremental Net Income before Tax (B-C-D) 6,650 7,050 7,450 5,250 F Tax @ 40% 2,660 2,820 2,980 2,100 G Incremental Net Income after Tax (E-F) 3,990 4,230 4,470 3,150 I Incremental Cashflow (G+Depreciation) 14,740 14,980 15,220 13,900 J Net working capital (Spending) -490 -540 -590 -490 K Net working capital recaptured -Inflow 2110 (Sum of all net Working capital spending as inflow) Incremental cashflows net of Working cap. -43,000 14,250 14,440 14,630 15,520 NPV = Discount factors @ 11% 1 0.9009 0.8116 0.7312 0.6587 Sum of all Discounted cashflow Discounted cashflows -43,000 12,838 11,720 10,697 10,223 2,478Related Questions
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