The Best Manufacturing Company is considering anew investment. Financial projections for the

QUESTION

The Best Manufacturing Company is
considering anew investment. Financial projections for the investment are
tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue
is received in cash, alloperating costs and income taxes are paid in cash,
and all cash flows occur at theend of the year. All net working capital
is recovered at the end of the project.
Year 0 Year 1 Year
2 Year 3 Year 4Investment $24,000Sales revenue
$12,500 $13,000 $13,500
$10,500Operating costs
2,700 2,800 2,900 2,100Depreciation
6,000 6,000
6,000 6,000Net working capitalspending
300 350
400 300 ?

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
theproject?
Answer: A) Net income = Sales Operating cost depreciation taxes Year 1 2 3 4 Sales Revenue 12500 13000 13500 10500 Operating Cost 2700 2800 2900 2100 Depreciation 6000 6000 6000 6000 Profit before tax 3800 4200 4600 2400 Taxes 1292 1428 1564 816 Incremental Net Income 2508 2772 3036 1584 B) After tax cash flow = Net Income + Depreciation Working capital spending Year 1 2 3 4 Sales Revenue 12500 13000 13500 10500 Operating Cost 2700 2800 2900 2100 Depreciation 6000 6000 6000 6000 Profit before tax 3800 4200 4600 2400 Taxes 1292 1428 1564 816 Incremental Net Income 2508 2772 3036 1584 Working capital spending 300 350 400 300 After-tax cash flow 8208 8422 8636 7284 C) Year 0 1 2 3 4 Initial investment 24000

x cash flow 8208 8422 8636 7284 PV @12% 7328.57 6713.97 6146.93 4629.11 Working capital spending 300 350 400 300 PV of NWC 267.86 279.02 284.71 190.66 PV of working capital reqired = 267.86 + 279.02 + 284.71 + 190.66 = 1022.24 Initial outlay = 24000 + 1022.24 = 25022.24 PV of the inflows = 7328.57 + 6713.97 + 6146.93 + 4629.11 + 1022.24 = 25841 (The amount of NWC invested in the beginning is released at the end of the projects life) NPV = PV of Infows PV of outflows = 25841 25022.24 = $819

ANSWER:

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