Investments - Net Income/Cash Flow
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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 0 Year 1 Year 2 Year 3 Year 4
Sales revenue 7,000 7,000 7,000 7,000
Operating costs 2,000 2,000 2,000 2,000
Investment 10,000
Depreciation 2,500 2,500 2,500 2,500
Net working capital 200 250 300 200 -
(end of year)
a. Compute the incremental net income of the investment for each year.
b. Compute the incremental cash flows of the investments for each year.
c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
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Solution Summary
The solution calculates the cash flow for the investments for Best Manufacturing Company.
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Year 0 Year 1 Year 2 Year 3 Year 4
Sales revenue 7,000 7,000 7,000 7,000
Less Operating costs 2,000 2,000 2,000 2,000
Operating Profit 5,000 5,000 5,000 5,000
Less Depreciation 2,500 2,500 2,500 2,500
Profit before ...
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