Calculating Project NPV. The Freeman Manufacturing Company is considering a new

Question

Calculating Project NPV. The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 34 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 $31,000 Sales Revenue 14,200 15,900 15,700 12,900 Operating Costs 2,100 2,100 2,100 2,100 Depreciation 7,750 7,750 7,750 7,750 Net Working Capital Spending 450 175 250 275 a) Compute the incremental net income of the investment for each year. b) Compute the incremental cash flows of the investment for each year. c) Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?

Explanation / Answer

Solution: Statement showing computation of Project NPV Particulars 0 1 2 3 4 Investment 31000 Net Working Capital 450 175 250 275 Total Cash Outflows 31000 450 175 250 275 PVF @ 12% 1 0.8929 0.7972 0.7118 0.6355 Present Value of Cash Outflows 31000 401.805 139.51 177.95 174.7625 Total PVCO (A) 31894.03 Particulars 0 1 2 3 4 Sales Revenue 14200 15900 15700 12900 Operating Costs -2100 -2100 -2100 -2100 Depreciation -7750 -7750 -7750 -7750 Income before taxes 4350 6050 5850 3050 Tax @ 34% 1479 2057 1989 1037 Net Income after tax/ Incremental Net Income 2871 3993 3861 2013 Add: Depreciation 7750 7750 7750 7750 Operating Cash Flows 10621 11743 11611 9763 Net Working Capital receovered 0 0 0 1150 Total Cash Inflows ( Operating Cash Flows+NWC recovered) 10621 11743 11611 10913 PVF @12% 0.8929 0.7972 0.7118 0.6355 Present Value of Cash Inflows 9483.491 9361.52 8264.71 6935.212 Total PVCO (B) 34044.93 NPV (B)-(A) 2150.904 a) Incremental Net Income of the Project Particulars 1 2 3 4 Incremental Net Income 2871 3993 3861 2013 b) Incremental Cash Flows of Project Particulars 0 1 2 3 4 Cash Outflows (D) 31000 450 175 250 275 Cash Inflows (C) 0 10621 11743 11611 10913 Incremental Cash Flows (C-D) -31000 10171 11568 11361 10638 c) NPV of Project = -$2150.904

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