Problem: 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 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.
Year 1 Year 2 Year 3 Year 4
Investment $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 —
1. Compute the incremental net income of the investment for each year.
2. Compute the incremental cash flows of the investment for each year.
3. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?