Question
The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 40 percent. Assume
The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 40 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 | $ | 26,000 | ||||||||
Sales revenue | $ | 13,500 | $ | 14,000 | $ | 14,500 | $ | 11,500 | ||
Operating costs | 2,900 | 3,000 | 3,100 | 2,300 | ||||||
Depreciation | 6,500 | 6,500 | 6,500 | 6,500 | ||||||
Net working capital spending | 320 | 370 | 420 | 320 | ? | |||||
a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)
Year 1 | Year 2 | Year 3 | Year 4 | ||
Net income | $ | $ | $ | $ | |
|
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 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
Cash flow | $ | $ | $ | $ | $ |
|
c. Suppose the appropriate discount rate is 11 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.) NPV $
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