Problem 8-2 Calculating Project NPV The Freeman Manufacturing Company is conside
ID: 2658044 • Letter: P
Question
Problem 8-2 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 35 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. 12.5 Year 38,80e Year 1 Year 2 Year 3 Investment Sales revenue Operating costs Depreciation Net working capital spending $19,5 $20,8 $2,500 $17,588 4,100 4,280 9,see see 490 9,see 448 9,see eBook a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) Year 1 Year 2 Year 3 409 135 si 292 References b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) ear 4 Year 2 S(38440 12845 $1341 $ 1433 Cash flow c. Suppose the appropriate discount rate is 13 percent. What is the NPV of the project? (Do not round intermediate calculations an round your answer to 2 decimal places, e.g., 32.16.) NPVExplanation / Answer
Computation of Net income and Cash flow:
Year 0
Year 1
Year 2
Year 3
Year 4
Investment
$38,000
Sales revenue
$19,500
$20,000
$20,500
$17,500
Less: Operating cost
$4,100
$4,200
$4,300
$3,500
EBITDA
$15,400
$15,800
$16,200
$14,000
Less: Depreciation
$9,500
$9,500
$9,500
$9,500
EBIT
$5,900
$6,300
$6,700
$4,500
Less: Interest
$0
$0
$0
$0
Less: Tax @ 35 %
$2,065
$2,205
$2,345
$1,575
Net Income
$3,835
$4,095
$4,355
$2,925
Less: Working capital
$440
$490
$540
$440
($1,910)
Add: Depreciation
$9,500
$9,500
$9,500
$9,500
Incremental cash flow
($38,440)
$12,845
$13,055
$13,415
$14,335
Working capital release at the end of project = $ 440 + $ 490 + $ 540 + $ 440 = $ 1,910
Computation of NPV:
Year
Cash Flow (C)
PV Factor calculation
PV Factor @ 13 %(F)
PV (= C x F)
0
$ (38,440)
1/(1+13%)^0
1
($38,440.00)
1
$ 12,845
1/(1+13%)^1
0.884955752
$11,367.26
2
$ 13,055
1/(1+13%)^2
0.783146683
$10,223.98
3
$ 13,415
1/(1+13%)^3
0.693050162
$9,297.27
4
$ 14,335
1/(1+13%)^4
0.613318728
$8,791.92
NPV
$1,240.43
Year 0
Year 1
Year 2
Year 3
Year 4
Investment
$38,000
Sales revenue
$19,500
$20,000
$20,500
$17,500
Less: Operating cost
$4,100
$4,200
$4,300
$3,500
EBITDA
$15,400
$15,800
$16,200
$14,000
Less: Depreciation
$9,500
$9,500
$9,500
$9,500
EBIT
$5,900
$6,300
$6,700
$4,500
Less: Interest
$0
$0
$0
$0
Less: Tax @ 35 %
$2,065
$2,205
$2,345
$1,575
Net Income
$3,835
$4,095
$4,355
$2,925
Less: Working capital
$440
$490
$540
$440
($1,910)
Add: Depreciation
$9,500
$9,500
$9,500
$9,500
Incremental cash flow
($38,440)
$12,845
$13,055
$13,415
$14,335