Problem 6-2 Calculating Project NPV The Best Manufacturing Company is considerin
ID: 2740735 • Letter: P
Question
Problem 6-2 Calculating Project NPV The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. 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 $ 28,000
Sales revenue $ 14,500 $ 15,000 $ 15,500 $ 12,500
Operating costs 3,100 3,200 3,300 2,500
Depreciation 7,000 7,000 7,000 7,000
Net working capital spending 340 390 440 340
? a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) Year 1 Year 2 Year 3 Year 4
Net income $ $ $ $ b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) Year 0 Year 1 Year 2 Year 3 Year 4
Cash flow $ $ $ $ $
c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) NPV $
Explanation / Answer
Please refer the table below for detailed solution.
a). Net Income
Yea1 Year2 Year3 Year4
2904 3168 3432
b) Incremental Cash Flow
Year0 Year1 Year2 Year3 Year4
-28000 9564 10118 10382 9420
c) NPV = 1981.58
Year 0 1 2 3 4 i) Investment -28000 ii) Sales 14500 15000 15500 12500 iii) Operating Cost 3100 3200 3300 2500 iv) Depreciation 7000 7000 7000 700 v) Proft Before Tax (ii-iii-iv) 4400 4800 5200 3000 vi) Tax (@34%) (v x 34%) 1496 1632 1768 1020 vii) Net Income (v-vi) 2904 3168 1768 1020 viii) Changes in Working Capital Investment -340 -50 -50 100 ix) Working Capital Recovery 340 x) Cash Flow (i+vii+iv+viii+ix) -28000 9564 10118 10382 9420 xi) Discount Factors (12% discount rate) 1 0.892857 0.797194 0.711802 0.635518 xii) PV -28000 8539.2857 8066.008 7389.703 5986.98 xiii) NPV (sum of xii) 1981.58