A8.

A8.2

Sales
Variable cost
Depreciation
Tax rate

$
$
$

OCF
Depr. tax shield

$
$

Projected sales
Costs
Depreciation
Tax rate

$
$
$

876,400
547,300
128,000
34%
260,726
43,520
96,000
49,000
4,500
35%

Sales
Variable costs
Depreciation
EBIT/EBT
Taxes (34%)
Net Income

876,400
547,300
128,000
201,100
68,374
132,726

OCF1 = EBT+Dep-Tax
$

32,125

OCF2 = NI + Dep
$

A8.3

A8.4

Sales
Variable costs
Depreciation
EBT
Taxes (35%)
Net Income

Costs
Pretax Salvage
Tax rate
Straight-Line Life
Project Life

$
$

468,000
72,000
35%
8
5

Asset investment
$ 4,200,000
Estimated annual sales$ 3,100,000
Costs
$ 990,000
Tax rate
35%
Straight-Line Life
3

A8.5

Required return

A8.6

Initial NWC
Pretax Salvage

A8.7

96,000
49,000
4,500
42,500
14,875
27,625

12%
$
$

300,000
210,000

NPV

281,701

Installation cost
Op. Cost Saving
Initial NWC
Pretax Salvage
Tax rate
Discount rate
Straight-Line Life

$
$
$
$

500,000
150,000
50,000
80,000
35%
11%
5

32,125

OCF3 = Sales - Costs - Taxes

$
32,125
OCF4 = (Sales-Costs)(1-T%)+DT%
$
32,125
Annual Dep Exp
Acc.depreciation
Book value

$
$
$

Aftertax cash flow

58,500
292,500
175,500
$108,225

OCF

NPV

$ 271,008.91
Year
0
1
2
3

1,861,500

Cash flow
$ (4,500,000)
$ 1,861,500
$ 1,861,500
$ 2,298,000

Annual Dep. Exp.

$
100,000
Aftertax Salvage
$
52,000
OCF
$
132,500
NPV
$
238.39
As NPV is positive, we may accept
the project.

A8.8

A8.9

Initial investment
Pretax Salvage
Op. Cost Saving
W.C. Reduction
Tax rate
Straight-Line Life

$ 1,000,000
$ 100,000
$ 380,000
$ 150,000
35%
5

Annual Dep. Exp.

Aftertax Salvage
OCF

$
$
$

Initial investment
Pretax Salvage
Op. Cost Saving - 1
W.C. Reduction
Annual Dep. Exp.
Aftertax Salvage
Tax rate
Required return
Straight-Line Life

$ 1,000,000
$ 100,000
$ 400,000
$ 150,000
$ 200,000
$
65,000
35%
20%
5

Initial investment
Pretax Salvage
Op. Cost Saving - 2
W.C. Reduction
Annual Dep. Exp.
Aftertax Salvage
Tax rate
Required return
Straight-Line Life

$ 1,000,000
$ 100,000
$ 320,000
$ 150,000
$ 200,000
$
65,000
35%
20%
5

Year
0
1
2
3
4
5

200,000
65,000
317,000

Required pretax cost savings:

NPV w/o OCF
($884,160)
Required OCF
$295,645
OCF - DepTaxShield
$225,645

$
$
$
$
$
$

IRR

NPV
Accept/Reject

NPV
Accept/Reject

Cost savings
Both cases:

Cash flow
(850,000)
317,000
317,000
317,000
317,000
232,000
23.49%

Year
0 $
1
2
3
4
5
$

Cash flow
(850,000)
330,000
330,000
330,000
330,000
245,000
102,742
Accept

Year
0 $
1
2
3
4
5
$

Cash flow
(850,000)
278,000
278,000
278,000
278,000
193,000
(52,769)
Reject

347,146