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. Investment Sales revenue Operating costs Depreciation Net working capital spending Net income Cash flow Year 1 $ Year O Year 1 $27,000 330 a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) NPV Year 2 Year 3 Year 4 $14,000 $14,500 $15,000 $12,000 3,200 2,400 6,750 6,750 330 ? 280 3,000 6,750 380 Year O $ -27330 3,100 6,750 430 Year 2 $ 3069 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.) Year 3 $ 3333 Year 1 $ Year 4 Year 2 $ c. Suppose the appropriate discount rate is 13 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 1881 Year 3 $ Year 4 $
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. Investment Sales revenue Operating costs Depreciation Net working capital spending Net income Cash flow Year 1 $ Year O Year 1 $27,000 330 a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) NPV Year 2 Year 3 Year 4 $14,000 $14,500 $15,000 $12,000 3,200 2,400 6,750 6,750 330 ? 280 3,000 6,750 380 Year O $ -27330 3,100 6,750 430 Year 2 $ 3069 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.) Year 3 $ 3333 Year 1 $ Year 4 Year 2 $ c. Suppose the appropriate discount rate is 13 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 1881 Year 3 $ Year 4 $
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 6P
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