Hi there,

I was just wondering why the Net Working Capital in the SOLUTION of this question at year 4 is equal to the sum of the Net Working Capital of the previous 4 periods (year 0, year 1, year 2 and year 3)?

My understanding is that Net Working Capital is Current Assets - Current Liabilities - we are not given these values and so I am just wondering what the reason is for the 875 value being equivalent to the sum of previous NWC spend?

I am looking for a justification on this point, I largely understand the solution beyond this.

I have attached both the question and the solution below.

Kind Regards,

N

2. Calculating Project NPV 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 ows occur at the end of the year. All net working capital is recovered at the end of the project. $ Investment 27,400 Sales revenue 12,900 14,000 15,200 11,200 Operating costs 2,700 2,800 2,900 2,100 Depreciation 6,850 6,850 6,850 6,850 Net working capital spending 300 200 225 150 ? a. Compute the incremental net income of the investment for each year, b. Compute the incremental cash OWS of the investment for each year. .0 Suppose the appropriate discount rate is 12 percent. What is the NPV of the project? We Will use the bottom-up approach to calculate the operating cash ow for each year. We also must be sure to include the net working capital cash flows each year. So, the net income and total cash ow each year will be: Year 1 Year 2 Year 3 Year 4 $12,90 $14,00 $15,20 $11,20 Sales 0 0 0 0 Costs 2,700 2,800 2,900 2,100 Depreciation 6,850 6,850 6,850 6,850 EBT $3,350 $4,350 $5,450 $2,250 Tax 1,139 1,479 1,853 765 Net income $2,211 $2,871 $3,597 $1,485 $10,44 OCF $9,061 $9,721 7 $8,335 $27,40 Capital spending 0 0 0 0 0 Change in NWC 300 200 225 150 875 Incremental cash $27,70 $10,29 ow 0 $8,861 $9,496 7 $9,210 The NPV for the project is: NPV = $27,700 + $8,861 / 1.12 + $9,496/1.122 + $10,297l1.123 + $9,210/1.124 NPV = $964.08