Inclass Example
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kimnganthi.nganInclass Example
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kimnganthi.nganFeasibility study/market research cost: $500,000
The company has an existing piece of land that could be used for this
project, with current market value of $150,000. Assume that after 5
years of usage, by the end of the project, the market value of that
land still remains the same
The machinery used to produce the tea could be bought for
$100,000. This machine is depreciated according to a 5-year property
MACRS schedule
The project requires an initial investment in working capital of
$10,000; The working capital changes each year in response to
changes in sale volume (10% of sales)
This project is intended to last for 5 years, the projected sales volume
for each year is 5,000; 10,000; 8,000; 6,000; and 2,000 bottles
respectively
Price per bottle: $30 (first year). This sale price will increase by 1%
per year
Production cost for the tea: $10 per bottle. This cost will increase by
5% per year
At the end of project life, the machinery could be sold as scrap for
$30,000
Discount rate 15% and tax rate 34%
1. Develop the depreciation schedule
Beginning Depreciation
balance rate
1 100,000 20.0%
2 80,000 32.0%
3 48,000 19.20%
4 28,800 11.52%
5 17,280 11.52%
6 5,760 5.76%
100.0%
2. Estimate the accounting profit
Year 1 2
Sale volume 5,000 10,000
Price (increase by 1% each year) 30 30.30
Production cost (increase by 5% each year) 10 10.5
Sale revenue = sale volume x price 150,000 303,000
Total production cost = sale volume x production cost 50,000 105,000
EBITDA = sale revenue - total production cost 100,000 198,000
Depreciation expense (calculated above) 20,000 32,000
EBIT = EBITDA - depreciation expense 80,000 166,000
Interest expense (DO NOT SUBTRACT INTEREST EXPENSE)
Taxes = tax rate x EBIT 27,200 56,440
NI = EBIT - taxes 52,800 109,560
3. Estimate Operating cashflow
1 2
Operating cashflow (OCF) = NI + depreciation expense 72,800 141,560
4. Estimate project cashflow
0 1
Initital investment
Land (150,000)
Machinery (100,000)
OCF 72,800
Investment in NWC
Requirement in NWC 10,000 15,000
Changes in NWC (10,000) (5,000)
Terminal cashflow
Recovery of NWC
Disposal of assets
Land
Machinery
Net cashflow (260,000) 67,800
NPV 128,991.97
* Calculate the after-tax disposal of machine
Tax (8,241.60)
After-tax disposal of machine 21,758.40
Depreciation expense =
total value of asset x Ending
depreciation rate balance
20,000 80,000
32,000 48,000
19,200 28,800
11,520 17,280
11,520 5,760
5,760 -
3 4 5
8,000 6,000 2,000
30.603 30.909 31.218
11.03 11.58 12.16
244,824 185,454 62,436
88,200 69,458 24,310
156,624 115,997 38,126
19,200 11,520 11,520
137,424 104,477 26,606
46,724 35,522 9,046
90,700 68,955 17,560
3 4 5
109,900 80,475 29,080
2 3 4 5
141,560 109,900 80,475 29,080
30,300 24,482 18,545 6,244
(15,300) 5,818 5,937 12,302
6,244
150,000
21,758.40
126,260 115,717 86,412 219,383.85
Machine $ 15,000
Salvage value at the Annual
end of each year maintenance
(Residual value) cost
1 6,000 1,000
2 3,000 2,000
3 - 3,000
Tax 34%
Required rate of
return 12%
1. Use the machine for 1 year
1
Sales 0
Maintenance cost 1,000
Depreciation
expense $ 9,000
EBIT (10,000)
Tax (3,400)
NI (6,600)
OCF 2,400
Project CF
0 1
Initial investment $ (15,000)
OCF 2,400
Investment in
NWC 0 0
Terminal CF 6,000
CF of the project $ (15,000) $ 8,400
NPV $ (7,500)
AE ($8,400.00)
2. Use the machine for 2 years
1 2
Sales 0 0
Maintenance cost 1,000 2,000
Depreciation
expense $ 6,000 $ 6,000
EBIT (7,000) (8,000)
Tax (2,380) (2,720)
NI (4,620) (5,280)
OCF 1,380 720
Project CF
0 1 2
Initial investment $ (15,000)
OCF 1,380 720
Investment in
NWC 0 0 0
Terminal CF 3,000
CF of the project $ (15,000) $ 1,380 $ 3,720
NPV $ (10,802.30)
AE ($6,391.70)
3. Use the machine for 3 years
1 2 3
Sales 0 0 0
Maintenance cost 1,000 2,000 3,000
Depreciation
expense $ 5,000 $ 5,000 $ 5,000
EBIT (6,000) (7,000) (8,000)
Tax (2,040) (2,380) (2,720)
NI (3,960) (4,620) (5,280)
OCF 1,040 380 (280)
Project CF
0 1 2 3
Initial investment $ (15,000)
OCF 1,040 380 (280)
Investment in
NWC 0 0 0 0
Terminal CF -
CF of the project $ (15,000) $ 1,040 $ 380 $ (280)
NPV $ (13,967.79)
AE ($5,815.48)
Summary
1 2 3
NPV $ (7,500) $ (10,802.30) $ (13,967.79)
AE ($8,400.00) ($6,391.70) ($5,815.48)
Equipment $ 30,000
Life 3
Tax rate 34%
Discount rate 14%
Sales volume 10,000
Price 4.96
Variable cost per unit 2.04
Fixed cost 10,500
Sales revenue 49,570
Total variable cost 20,400
Total fixed cost 10,500
EBIDT 18,670
Depreciation $ 10,000
EBIT 8,670
Tax 2,948
NI 5,722
OCF 15,722
Cashflow of project
0 1 2 3
Initial investment (30,000)
OCF 15,722 15,722 15,722
Investment in NWC (20,000)
Terminal CF 20,000
CF of project (50,000) 15,722 15,722 35,722
NPV -