Investment analysis through incremental analysis

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Reference no: EM1313792

Investment Analysis through Incremental Analysis

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
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	-

1. Compute the incremental net income of the investment for each year.

2. Compute the incremental cash flows of the investment for each year.

3. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?

Note: The first step is to determine the actual amount of cash for each year. Remember to adjust for income for non-cash items (depreciation) and the payment of taxes. This should be done for the initial investment as well as each year of the project (4 years).

Reference no: EM1313792

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