QUESTION 10 Burlington is considering a new investment. Financial projections fo

Question

QUESTION 10 Burlington is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 25 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. Suppose the appropriate discount rate is 12 percent. Determine the net working capital spending for Year 4 then calculate the NPV of the project. What is the project NPV? Year 0 $37.000 Year 1 Year 2 Year 3 Year 4 Investment Sales revenue Operating cost Depreciation Net working capital spendin $18,000 $18,200 $18,500 $19,500 3,800 6,900 3,100 6,900 400 3,200 6,900 350 3,500 6,900 420 500 $2,617.80 $2,302.50 $2,004.31 $1,748.94 $1,492.67

Explanation / Answer

There is NIL requirement of working capital at the end of 4th year as project ends at that point. Calculation of NPV of the project Year 0 1 2 3 4 NPV Investment -$37,000.00 Net working capital spending -$500.00 -$400.00 -$350.00 -$420.00 $0.00 Net working capital recovered $1,670.00 Operating cash flow $12,900.00 $12,975.00 $12,975.00 $13,500.00 Net Cash Flow -$37,500.00 $12,500.00 $12,625.00 $12,555.00 $15,170.00 x Discount Factor @ 12% 1 0.8928571 0.7971939 0.7117802 0.6355181 Present Values -$37,500.00 $11,160.71 $10,064.57 $8,936.40 $9,640.81 $2,302.50 NPV of the project $2,302.50 Working Calculation of Operating cash flows Year 1 2 3 4 Sales Revenue $18,000.00 $18,200.00 $18,500.00 $19,500.00 Less : Operating costs $3,100.00 $3,200.00 $3,500.00 $3,800.00 Less : Depreciation $6,900.00 $6,900.00 $6,900.00 $6,900.00 Profit before tax $8,000.00 $8,100.00 $8,100.00 $8,800.00 Less : Tax @ 25% $2,000.00 $2,025.00 $2,025.00 $2,200.00 Add : Depreciation $6,900.00 $6,900.00 $6,900.00 $6,900.00 Operating Cash flow $12,900.00 $12,975.00 $12,975.00 $13,500.00

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