09.07.2022 - 21:45

# The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 38 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid

Question:

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 38 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 $29,000 Sales revenue$15,000 $15,500$16,000 $13,000 Operating costs 3,200 3,300 3,400 2,600 Depreciation 7,250 7,250 7,250 7,250 Net working capital spending 350 400 450 350 ? 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? Answers (1) • April 3, 2023 в 21:59 a. To compute the incremental net income for each year, we need to subtract the operating costs and depreciation from the sales revenue. The net income for each year is: - Year 0: N/A (no sales revenue) - Year 1:$15,000 - $3,200 -$7,250 = $4,550 - Year 2:$15,500 - $3,300 -$7,250 = $4,950 - Year 3:$16,000 - $3,400 -$7,250 = $5,350 - Year 4:$13,000 - $2,600 -$7,250 = $3,150 b. To compute the incremental cash flows for each year, we need to add back the depreciation and subtract the net working capital spending. The cash flows for each year are: - Year 0: -$29,000 (investment) - Year 1: $4,550 +$7,250 - $400 =$11,400 - Year 2: $4,950 +$7,250 - $450 =$11,750 - Year 3: $5,350 +$7,250 - $350 =$12,250 - Year 4: $3,150 +$7,250 - $x =$10,400- x (where x is the net working capital recovered at the end of the project) c. To calculate the NPV of the project, we need to discount the cash flows at the appropriate rate (12% in this case) and subtract the initial investment. Using a spreadsheet or financial calculator, we can get: NPV = -$29,000 + ($11,400/1.12) + ($11,750/1.12^2) + ($12,250/1.12^3) + ($10,400- x)/1.12^4 NPV = -$29,000 + $9,910.71 +$8,384.86 + $7,640.84 + ($10,400- x)/1.12^4 NPV = -$29,000 +$32,336.41 + ($10,400- x)/1.573 So, the NPV of the project depends on the value of x, the net working capital recovered at the end of the project. If x is zero (i.e. all net working capital is spent and not recovered), then the NPV is$3,336.41. If x is greater than zero, then the NPV will be higher. The company should therefore evaluate the feasibility of recovering some net working capital at the end of the project, and estimate its value to determine whether the investment is worth pursuing.