Incremental Net Operating income is the income that you have accumulated and then have derived from your businesses earnings. This calculation is established once the operating costs have been deducted from the net income total. So, to summarise, it is your income before any taxes or interest have been deducted from the total earnings. This method is regarded as the most effective way to gain a comprehensive indication of how well the company is doing. This is because the total net income has not been manipulated by any form of management. In order to achieve the Incremental Net Operating Income, you subtract your operating expenses from your gross profit.
For more in depth and comprehensive instructions, please see below:
Firstly, compute your gross sales. Your gross sales are the total receipts from all of the goods that you have sold. You then subtract the purchase price of the goods. You can then subtract your operating expenses in order to compute your Incremental Net Operating Income. Your Net Operating Income is calculated by subtracting your operating expenses from your gross profit.
Be aware that very often some expenses are overlooked, for instance, insurance expenses and other kinds of administrative costs. It is these of costs that all add up to your overall operating expenses.
Furthermore, please note that the above step has been oversimplified. Every single last penny that has been spent in order to ensure the smooth running of your business is classified as a operating expense, and therefore must be accounted for.
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?