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The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 21 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 $27,400
Sales revenue $14,500 $16,100 $17,500 $14,000
Operating costs 3,450 3,375 5,300 3,900
Depreciation 6,850 6,850 6,850 6,850
Net working capital spending 355 255 335 205

Required:
Compute the incremental net income of the investment for each year.

Respuesta :

jepessoa

Answer:

the incremental net income:

  • year 1 = $3,318
  • year 2 = $4,641.25
  • year 3 = $4,226.50
  • year 4 = $2,567.50

Explanation:

the incremental net income:

year 1 = [($14,500 - $3,450 - $6,850) x 0.79] = $3,318

year 2 = [($16,100 - $3,375 - $6,850) x 0.79] = $4,641.25

year 3 = [($17,500 - $5,300 - $6,850) x 0.79] = $4,226.50

year 4 = [($14,000 - $3,900 - $6,850) x 0.79] = $2,567.50

the incremental cash flows:

year 0 = -$27,400 - $355 = -$27,755

year 1 = $3,318 + $6,850 - $255 = $9,913

year 2 = $4,641.25 + $6,850 - $335 = $11,156.25

year 3 = $4,226.50 + $6,850 - $205 = $10,871.50

year 4 = $2,567.50 + $6,850 + $1,150 = $10,567.50

I cannot calculate the NPV since there is no discount rate.

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