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APPENDIX

Old Machine
Purchase Price of Old Machine
Less Accumulated Depreciation (W1)

$
2,000,000
(1,700,000)

Net Book Value

300,000

Sales Proceed from Old Machine

200,000

Loss

100,000

Tax @ 30%

Cash Inflows from Old Machine

30,000

230,000

New Machine

Purchase Price of New Machine

1,200,000

Add Other Costs Costs:


Shipping

100000

Site Preparation Cost

100000

Inspection

300000
500,000

Total Capitalized Costs


Opening Inventory
Initial Investment
Cash Flow from Old Machine
Net Initial Investment

1,700,000
50,000
1,750,000
230,000
1,520,000

Workings:
1. Depreciation = Cost of Machine- Salvage Value/ Useful Life
= 2,000,000- 0/20
= 100,000

Therefore Accumulated Depreciation = 100,000* useful life of 17 years


= 1,700,000

2. Net Book Value (NBV) = Cost Accumulated Depreciation


= 200,000 (17 * 100,000) = $300,000
3. Profit/ (Loss) on Disposal = Sale proceeds Last NBV
= 200,000 300,000 = ($100,000)
4. Net Depreciation

Depreciation on New Machine =Cost (capitalized) Salvage value


# of useful years
= 1,700,000 170,000 = $382,500
4
Depreciation on New Machine = 382,500
Depreciation on Old Machine = (100,000)
282,500
5. Salvage Value = 10% of Capitalized Costs
= 10% * $1,700,000
= $170,000

YEAR 1
Savings

YEAR 2

YEAR 3

YEAR 4

700,000

650,000

600,000

750,000

(100,000)

(100,000)

(100,000)

(100,000)

Upkeep

(20,000)

(20,000)

(20,000)

(20,000)

Net Savings

580,000

530,000

480,000

630,000

Net Depreciation

282,500

282,500

282,500

(382,500)

Taxable Profit

297,500

247,500

197,500

247,500

Tax @ 30%

(89,250)

(74,250)

(59,250)

(74,250)

Net Income

208,250

173,250

138,250

173,250

Net Depreciation

282,500

282,500

282,500

382,500

Operating Cash Flows

490,750

455,750

420,750

555,750

Less Capitalization Costs

Opening Inventory

50,000

Salvage Value
Net Operating Cash Flows
PVIF @ 12.5%
DCF
Total DCF
Less Net Initial Investment
Net Present Value

170,000
490,750

455,750

420,750

775,750

0.889

0.790

0.7020

0.624

435,222.22

360,098.77

295,506.17

484,296.91

1,576,124.07
-1,520,000.00
56,124.07

Net Present Value

1
490,750.00
0.888888889

2
455,750.00
0.79012357

Discounted Cash flows

436,222.22

360,098.82

Total Discounted Cash


flow
Net investment
Net Present Value

1,576,124.12

Years
Net Cash Flows
PVIF @12.5%

3
4
420,750.00 775,750.00
0.70233196
0.6242951
295,506.17
484,296.91

1,520,000.00
56,124.12

Internal Rate of Return (IRR)


PVIF

Year

1.1413361411967000

Cash Flow ($)


0
1
2
3
4

(1520000.00)
490750
455750
420750
775750

Using PVIF AS
14.13%=
1/(1.1.14133)n
1.00000000
0.87616607
0.76766698
0.67260376
0.589312592
Total yr1 to yr 4

Discounted
Cash Flow
(DCF) ($)
(1520000.00)
429978.4983
349864.2262
282998.0321
457159.2435
1520000
0.000000237

Accounting Rate of Return (ARR)

ARR=

Total Cash FlowsDepreciation


Initial Investment

= 52062.53
1520000
= 0.0343 or 3.43%

Payback Period

Year

Cash flow

Cumulative cash
flow

1
2
3
4

490,750.00
455,750.00
420,750.00
775,750.00

490,750.00
946,500.00
1,367,250.00
2,143,000.00

Profitability Index (PI)


P.I.=
=
=
=

1+NPV/ Initial Investment


1+ 56124.12 /1520000
1+0.369
1.0369