Question: The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. Cash flows are in $ thousands and the corporate tax rate is 34%. Assume all sales revenue is received in cash, all operating costs & income taxes are paid in cash, & all cash flows occur at the end of the year.
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|
Year 0
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Year 1
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Year 2
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Year 3
|
Year 4
|
|
Investment
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$10,000
|
-
|
-
|
-
|
-
|
|
Sales revenue
|
-
|
$7,000
|
$7,000
|
$7,000
|
$7,000
|
|
Operating costs
|
-
|
2,000
|
2,000
|
2,000
|
2,000
|
|
Depreciation
|
-
|
2,500
|
2,500
|
2,500
|
2,500
|
|
Net working capital (end of year)
|
200
|
250
|
300
|
200
|
-
|
[A] Calculate the incremental net income of the investment for each year.
[B] Calculate the incremental cash flows of the investment for each year.
[C] Assume the appropriate discount rate is 12%. Calculate the NPV of the project?
Note: The 1st step is to estimate the actual amount of cash for each year. Remember to adjust for income for non-cash items [depreciation] & the payment of taxes. This should be done for the initial investment as well as each year of the project [4 years].