Incremential Cash Flow = OCF+NWC+Capital Spending
OCF = Net Income + Depreciation = 1650 + 2500 = 4150
Net Income = (Sales - Costs - Depreciation)x(1-0.34)=1650 (each year)
Operating Cash Flows: 0, 4150, 4150, 4150, 4150
Capital Spending: -10000, 0, 0 , 0, 0
NWC: -200, -250, -300, -200, 950
Incremential CFs: -10200, 3900, 3850, 3950, 5100
NPV with discount rate 12% = 2404
Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $4 of the overhead is variable with respect to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $3 per bracelet and would also require acquisition of a special tool costing $270 that would have no other use once the special order is completed. This order would have no effect on the company's regular sales and the order could be fulfilled using the company's existing capacity without affecting any other order.
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 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?