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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%. 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.

 

Year 0

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

-

[A] find out the incremental net income of the investment for each year.

[B] find out the incremental cash flows of the investment for each year.

[C] Assume the appropriate discount rate is 12%. find out 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].

 

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M918538

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