Template for Questions 21 and 23 in HW 7

21. Plant and equipment = $45,000 to be depreciated to zero for 4 years using straight line.
Depreciation expense = 45,000/4 = 11,250 per year.
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Net working capital (20% of revenue in the following year)

Change in NWC
Change in NWC after reversing the sign
Investment in plant & equipment
Disposal of machine & equipment
Cash flow from investments in NWC and in fixed assets

Revenue (given)
Cost (40% of revenue)
Depreciation
Pretax profit = Rev - Cost - Dep
Taxes at 40% of the pretax profit
Net income = Pretax profit - taxes
Depreciation
Operating cash flow = Net income + depreciation
Total cash flow = Operating Cash flow +
Cash flow from investments in NWC and in fixed assets

NPV

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Year
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23. The machine costs $100,000 to be depreciated using straight line to the salvage value of 20,000 over 5 years.
Hence, the depreciation expense is (100,000 20,000)/5 = 16,000 per year.

It is assumed that at the end of year 5, the machine can be sold for $30,000.
Book value at the end of year 5 = 100,000 - (5x16,000) = $20,000.
Selling = $30,000
- tax on gains = -0.35(30,000 - 20,000) = $3,500
After-tax net proceed at the end of year 5 = 30,000 3,500 = $26,500.

The project also requires a working capital of $10,000 which will be kept at that level each year.

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Year
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Year
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Net working capital

Change in NWC
Change in NWC after reversing the sign
Investment in plant & equipment
Disposal of machine & equipment
Cash flow from investments in NWC and in fixed assets

Revenue (given, cost savings per year)

Cost
Depreciation (from calculation above)
Pretax profit = Rev - Cost - Dep
Taxes at 35% of pretax profit
Net income = Pretax profit - taxes
Depreciation
Operating cash flow = Net income + Depreciation
Total cash flow = Operating cash flow +
Cash flow from investments in NWC and in fixed assets
NPV