Capital budgeting cash flow estimation

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- Price of New Asset - Installation, Shipping & Modification Costs = Installed Cost - Increases in NOWC = Investment Outlay

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(127,000) Asset Cost ( 20,000) Installation Cost (147,000) Installed Cost ( 4,000) Increased NOWC (151,000) Investment Outlay

+  Revenue -  Operating Expenses -  Depreciation = EBIT - Tax = NOPAT + Depreciation reversal = Operating Cash Flow

Year Installed Cost MACRS Rate Depreciation 1 147,000 .33 48,510 2 147,000 .45 66,150 3 147,000 .15 22,050 4 147,000 .07 10,290

85,000 Revenue (29,750) Operating Cost (48,510) Depreciation (33%) 6,740 EBIT (2,292) Tax (34%) 4,448 NOPAT 48,510 Depreciation 52,958 OCF 1

1 2 3 4 Revenue 85,000 85,000 85,000 85,000 Op. Cost (29,750) (29,750) (29,750) (29,750) Depreciation (48,510) (66,150) (22,050) (10,290) EBIT 6,740 (10,900) 33,200 44,960 Taxes (2,292) 3,706 (11,288) (15,286) NOPAT 4,448 (7,194) 21,912 29,674 Depreciation 48,510 66,150 22,050 10,290 OCF 52,958 58,956 43,962 39,964

Year Cash Flows 0 (151,000) 1 52,958 2 58,956 3 43,962 4 39,964 + 37,000 = 76,964

Year Cash Flows Present Value (14%) 0 (151,000) (151,000) 1 52,958 46,454 2 58,956 45,365 3 43,962 29,673 4 76,964 45,569 Net Present Value => (NPV) $16,061

Discount Rate 14% 18.87% 25% NPV $16,061 $0 ($16,869) IRR 18.9% 18.9% 18.9%

Year Installed Cost MACRS Rate Depreciation Accumulated Depreciation Book Value 1 147,000 .33 48,510 48,510 98,490 2 147,000 .45 66,150 114,660 32,340 3 147,000 .15 22,050 136,710 10,290 4 147,000 .07 10,290 147,000 0

[object Object],[object Object],[object Object],[object Object],[object Object],2.Proposed Project

[object Object],[object Object],Should you subtract interest expense or dividends when calculating CF?

[object Object],Suppose $100,000 had been spent last year to improve the production line site. Should this cost be included in the analysis?

[object Object],[object Object],Suppose the plant space could be leased out for $25,000 a year. Would this affect the analysis?

[object Object],[object Object],[object Object],If the new product line would decrease sales of the firm’s other products by $50,000 per year, would this affect the analysis?

Basis = Cost + Shipping + Installation $240,000 What is the depreciation basis?

Year 1 2 3 4 % 0.33 0.45 0.15 0.07 Depr. $ 79.2 108.0 36.0 16.8 x Basis = Annual Depreciation Expense (000s) $240

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Salvage value Tax on SV Net terminal CF $25 (10) $15

Cash flow from sale = Sale proceeds - taxes paid. Taxes are based on difference between sales price and tax basis, where: Basis = Original basis - Accum. deprec.

[object Object],[object Object],[object Object],[object Object],[object Object],Example: If Sold After 3 Years (000s)

Project Net CFs on a Time Line Enter CFs in CFLO register and I = 10. NPV = $88,030. IRR = 23.9%. 0 1 2 3 4 (270,000) 105,780 119,523 93,011 136,463

What is the project’s MIRR? (000s) (270,000) MIRR = ? 0 1 2 3 4 (270,000) 105,780 119,523 93,011 136,463 102,312 144,623 140,793 524,191

What is the project’s payback? (000s) Cumulative: Payback = 2 + 44/93 = 2.5 years. 0 1 2 3 4 (270)* (270) 106 (164) 120 (44) 93 49 136 185

Capital budgeting cash flow estimation

Capital budgeting cash flow estimation

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Capital budgeting cash flow estimation