Problem 6-2 Calculating Project NPV The Best Manufacturing Company is considerin
ID: 2743069 • 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 40 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.
Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)
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.)
Suppose the appropriate discount rate is 10 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))
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 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.
Explanation / Answer
The Best Manufacturing Company Incremental Net Income Year 1 Year 2 Year 3 Year 4 Sales Revenue 15500 16000 16500 13500 Operating Cost 3300 3400 3500 2700 Depreciation 7500 7500 7500 7500 Income before taxes 4700 5100 5500 3300 Income Tax @ 40% 1880 2040 2200 1320 Net Income 2820 3060 3300 1980 Incremental Cash Flow of the Investment Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ (30,000.00) Net Income $ 2,820.00 $ 3,060.00 $ 3,300.00 $ 1,980.00 Depreciation $ 7,500.00 $ 7,500.00 $ 7,500.00 $ 7,500.00 Operating Cash Flow $ 10,320.00 $ 10,560.00 $ 10,800.00 $ 9,480.00 Working Capital Addition $ (360.00) $ (410.00) $ (460.00) $ (360.00) $ 1,590.00 Incremental Cash Flow $ (30,360.00) $ 9,910.00 $ 10,100.00 $ 10,440.00 $ 11,070.00 Discount Rate 10% Incremental Cash Flow $ (30,360.00) $ 9,910.00 $ 10,100.00 $ 10,440.00 $ 11,070.00 P.V Factor 10% for 5 years 1 0.90909 0.82645 0.75131 0.68301 P.V. $ (30,360.00) $ 9,009.08 $ 8,347.15 $ 7,843.68 $ 7,560.92 NPV $ 2,400.82 NPV is greater than 0 so project can be accepted.