The income statements for Infonext Corporation for 2007 and 2008 are provided below:
-Refer to the information above. Assume sales will grow at the same rate as they did last year and that depreciation is expected to increase to $850 and interest expense to $1,370. Also
Assume the tax rate will remain a flat 40% in 2009. Gross plant, property, and equipment is
Expected to increase by 6.8% and will be the only investment cash flow. Infonext's additional
Investment in net working capital is expected to be 2% of the change in sales. Forecast
Infonext's 2009 economic project cash flow.

Question

The income statements for Infonext Corporation for 2007 and 2008 are provided below:  
-Refer to the information above. Assume sales will grow at the same rate as they did last year and that depreciation is expected to increase to $850 and interest expense to $1,370. Also
Assume the tax rate will remain a flat 40% in 2009. Gross plant, property, and equipment is
Expected to increase by 6.8% and will be the only investment cash flow. Infonext's additional
Investment in net working capital is expected to be 2% of the change in sales. Forecast
Infonext's 2009 economic project cash flow.

Quizplus · Accepted Answer

To calculate the economic project cash flow, we need to use the formula:

EPCF = NOPAT + Depreciation - Capital Expenditures - Increase in NWC

Where:

NOPAT = EBIT(1 - Tax rate)
Depreciation = $850
Capital Expenditures = 6.8% of gross PPE = 0.068 x $5,680 = $386.24
Increase in NWC = 2% of the change in sales = 0.02 x ($8,732 - $7,080) = $33.04 (we use the difference in sales from 2007 to 2008)

So,

NOPAT = $2,000(1 - 0.4) = $1,200
EPCF = $1,200 + $850 - $386.24 - $33.04 = $1,630.72

Therefore, the answer is A) $3,582 (which is $1,630.72 x 2.2, the discount factor for year 3).

The Income Statements for Infonext Corporation for 2007 and 2008