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DECLINING DEPRECIATION (20%)

Year Initial Cost Income Annual Depr. (calcs) Book Value


0.2 *Book Value Book Value-Dep
0 10000
1 2000 2000 0.2*10000 8000
2 2000 1600 0.2*8000 6400
3 2000 1280 0.2*6400 5120
4 2000 1024 0.2*5120 4096
5 2000 819.2 0.2*4096 3276.8

STRAIGHT LINE DEPRECIATION

Year Initial Cost Income Annual Depr. (calcs) Book Value


(Initial Cost-Residual Value)/yearsBook Value-Dep
0 10000 1400
1 2000 1400 (10000-3000)/5 8600
2 2000 1400 (10000-3000)/5 7200
3 2000 1400 (10000-3000)/5 5800
4 2000 1400 (10000-3000)/5 4400
5 2000 1400 (10000-3000)/5 3000
(calcs) Taxable Income (calcs) Income Tax (calcs)
Book Value-Dep Income-Dep. Taxable Income * tax rate (=40%)

10000-2000 0 2000-2000 0 0*0.4


8000-1600 400 2000-1600 160 400*0.4
6400-1280 720 2000-1280 288 720*0.4
5120-1024 976 2000-1024 390.4 976*0.4
4096-819.2 1180.8 2000-819.2 472.32 1180.8*0.4

(calcs) Taxable Income (calcs) Income Tax (calcs)


Book Value-Dep Income-Dep. Taxable Income * tax rate (=40%)

10000-1400 600 2000-1400 240 600*0.4


8600-1400 600 2000-1400 240 600*0.4
7200-1400 600 2000-1400 240 600*0.4
5800-1400 600 2000-1400 240 600*0.4
4400-1400 600 2000-1400 240 600*0.4
ALTERNATIVE 1

Revenue $15,000 pa
Depreciation 10000 year 1
-2000 for every year

Year Initial Cost Income Annual Depr.


Depr-2000
0 30000
1 15000 10000
2 15000 8000
3 15000 6000
4 15000 4000
5 15000 2000
30000

ALTERNATIVE 2

Revenue $15,000 pa
Depreciation Straight Line Dep.
Final BV 0

Year Initial Cost Income Annual Depr.


IC/5
0 30000
1 15000 6000
2 15000 6000
3 15000 6000
4 15000 6000
5 15000 6000
30000

ALTERNATIVE 3

Revenue $18,000 pa
Depreciation Straight Line Dep.
Final BV 0

Year Initial Cost Income Annual Depr.


(IC-salvage)/5
0 50000
1 18000 5000
2 18000 5000
3 18000 5000
4 18000 5000
5 43000 5000
25000

To calculate tax deductable interest:


Year Annuity Payment Ammount Borrowed Interest
A=P(1+i)^n*(i/((1+i)^n-1)) Remaining Loan *0.1
0 20000 0
1 5275.95 2000
2 5275.95 1672.41
3 5275.95 1312.05
4 5275.95 915.66
5 5275.95 479.63

Thus, go with option 2!!


(Declining Depreciation)

(calcs) Book Value (calcs) Taxable Income


Depr-2000 Book Value-Dep Income-Dep.

given 20000 30000-10000 5000


10000-2000 12000 20000-8000 7000
8000-2000 6000 12000-6000 9000
6000-2000 2000 6000-4000 11000
4000-2000 0 2000-2000 13000

(calcs) Book Value (calcs) Taxable Income


IC/5 Book Value-Dep Income-Dep.

30000/5 24000 30000-6000 9000


30000/5 18000 24000-6000 9000
30000/5 12000 18000-6000 9000
30000/5 6000 12000-6000 9000
30000/5 0 6000-6000 9000

Salvage value 25000


Borrows 20000 capital which is

(calcs) Book Value (calcs) Interest Paid


(IC-salvage)/5 Book Value-Dep

(50000-25000)/5 45000 50000-5000 2000


(50000-25000)/5 40000 45000-5000 1672.41
(50000-25000)/5 35000 40000-5000 1312.05
(50000-25000)/5 30000 35000-5000 915.66
(50000-25000)/5 25000 30000-5000 479.63
Remaining Loan
emaining Loan *0.1 Remaining loan-Annuity+interest
20000
20000*0.1 16724.05 20000-5276+2000
16724*0.1 13120.51 16724-5276+1672.4
13121*0.1 9156.61 13120.5-5276+1312
9157*0.1 4796.32 9157-5276+916
4796*0.1 0.00 4796-5276+480
(calcs) Income Tax (calcs) Profit
Income-Dep. Taxable Income * tax rate (=40%) Profit=Income-Income Tax

15000-10000 2000 5000*0.4 13000


15000-8000 2800 7000*0.4 12200
15000-6000 3600 9000*0.4 11400
15000-4000 4400 11000*0.4 10600
15000-2000 5200 13000*0.4 9800
57000

(calcs) Income Tax (calcs) Profit


Income-Dep. Taxable Income * tax rate (=40%) Profit=Income-Income Tax

15000-6000 3600 9000*0.4 11400


15000-6000 3600 9000*0.4 11400
15000-6000 3600 9000*0.4 11400
15000-6000 3600 9000*0.4 11400
15000-6000 3600 9000*0.4 11400
57000

Annuity 5275.95 A=P(1+i)^n*(i/((1+i)^n-1))

Taxable Income (calcs) Income Tax (calcs)


Income-Dep-Interest Paid+SalvageTaxable Income * tax rate (=40%)

11000 18000-5000-2000 4400 4400*0.4


11327.59 18000-5000-1672 4531.04 4531*0.4
11687.95 18000-5000-1312 4675.18 4675*0.4
12084.34 18000-5000-916 4833.74 4834*0.4
37520.37 (18000+25000)-5000-480 15008.15 15008*0.4
(calcs)
t=Income-Income Tax

15000-2000
15000-2800
15000-3600
15000-4400
15000-5200

(calcs)
t=Income-Income Tax

15000-3600
15000-3600
15000-3600
15000-3600
15000-3600

Profit (calcs)
Profit=Income-Income Tax-Annuity

8324.05 18000-4400-5276
8193.01 18000-4531-5276
8048.87 18000-4675-5276
7890.31 18000-4834-5276
22715.9 18000+25000-15008-5276
55172.15
Fixed Capital 500 thousands
Working capital 100 thousands
Life 10 years
Salvage value 0
Depreciation Straight line
Tax rate 40%
Discount rate 5%

Year Capital Movement (calcs) Revenue Product Cost(expenditure)


Capital+WC (given) (given)
0 -100 -100
1 -450 -450 400 300
2 -50 -50 400 200
3 400 100
4 400 100
5 400 200
6 400 150
7 400 100
8 400 100
9 400 100
10 100 Salvage 400 150
Asuume 20% capital is spent in year 0, rest in year 1
Split over two years

Profit Before Tax (calcs) Depreciation(Calcs) Taxable Profit


(calcs)
Revenue-Product Cost (Capital-Salvage)/Years PBT-D

100 400-300 50 500/10 50


200 400-200 50 500/10 150 100-50
300 400-100 50 500/10 250 200-50
300 400-100 50 500/10 250 300-50
200 400-200 50 500/10 150 200-50
250 400-150 50 500/10 200 250-50
300 400-100 50 500/10 250 300-50
300 400-100 50 500/10 250 300-50
300 400-100 50 500/10 250 300-50
250 400-150 50 500/10 200 300-50
Tax (calcs) Profit After Tax(calcs) Cash Flow(calcs) CCF
TP*tax rate OCF=PBT-T CF=CM+OCF SUM(CF)
-100 -100 -100
20 50*0.4 80 80 -370 -370 -470
60 150*0.4 140 200-60 90 90 -380
100 250*0.4 200 300-100 200 200 -180
100 250*0.4 200 300-100 200 200 20
60 150*0.4 140 200-60 140 140 160
80 200*0.4 170 250-80 170 80 330
100 250*0.4 200 300-100 200 100 530
100 250*0.4 200 300-100 200 100 730
100 250*0.4 200 300-100 200 100 930
80 200*0.4 170 250-80 270 170+100 1200
(calcs) DCF (calcs) CCF (calcs)
DCF=PV(CF)=CF/(1.05)^n SUM(CF)
-100 -100 -100 -100
-100-370 -352.38 -370/(1.05^1) -452.38
-470+90 81.63 90/(1.05^2) -370.75
-380-200 172.77 200/(1.05^3) -197.98
-180+200 164.54 200/(1.05^4) -33.44
20+140 109.69 140/(1.05^5) 76.25
160+170 126.86 170/(1.05^6) 203.11
330+200 142.14 200/(1.05^7) 345.25
530+200 135.37 200/(1.05^8) 480.61
730+200 128.92 200/(1.05^9) 609.54
930+270 165.76 270/(1.05^10) 775.29
Compare the NPV of two pumps using the common denominator method (discount rate=

CM OC Life
Pump A $8,000 1800 4
Pump B $16,000 1600 7

Pump A NPV:
P1 P2 P3 P4
Value 8000 $5,880.24 $4,322.15 $3,176.91
Calcs 8000/(1.08)^4 8000/(1.08)^8 8000/(1.08)^12

Pump B NPV:
P1 P2 P3 P4
Value 16000 $9,335.85 $5,447.38 $3,178.49
Calcs 16000/(1.08)^7 16000/(1.08)^1416000/(1.08)^21

Pump A has a lower NPV and so is recommended.

Calculation of Total Average Annual Cost (to assess the economic life)

Initial Purchase $800


Salvage Value 0
Maintenance Cost Increasing at a rate of $100 per year

Year Maintenance Sum Maintenance Annual Maintence Cost


SUM(Maintence) Sum Maintenance/Year
1 0 0 0
2 100 100 50 100/2
3 200 300 100 300/3
4 300 600 150 600/4
5 400 1000 200 1000/5
6 500 1500 250 1500/6

Calculation of Equivalent Annual Cost (Of Maintenance + Capital Cost)

Capital 100000
Maintenance Year*7500
Project Life 10 years
Discount rate 8% pa

Year Maintenance PV(Maintenance) SUM(PV(Maintenance))


P=F/(1.08)^n
0 0 0
1 0 0 0/(1.08)^1 0
2 7500 6430.04 7500/(1.08)^2 6430.04
3 15000 11907.48 15000/(1.08)^3 18337.52
4 22500 16538.17 22500/(1.08)^4 34875.7
5 30000 20417.5 30000/(1.08)^5 55293.19
6 37500 23631.36 37500/(1.08)^6 78924.55
7 45000 26257.07 45000/(1.08)^7 105181.62
8 52500 28364.12 52500/(1.08)^8 133545.74
9 60000 30014.94 60000/(1.08)^9 163560.68
10 67500 31265.56 67500/(1.08)^10 194826.24
method (discount rate=8%)

P5 P6 P7
$2,335.12 $1,716.39 $1,261.59
8000/(1.08)^16 8000/(1.08)^20 8000/(1.08)^24

P5
$2,523.19
16000/(1.08)^28

Annual Investment Cost Average Annual Cost


Year 1 Investment/Year Annual Maintenance+Annual Investment
800 800 800
400 800/2 450
266.67 800/3 366.67
200 800/4 350
160 800/5 360
133.33 800/6 383.33

Equivalent Maintenance Annual CostEquivalent Annual Cost of Capital Recovery


SUM(PV(Maintenance))/Year Annuity=Equipment Cost*(1.08)^n* (0.08/(1.08^n-1)

108000
3215.02 6430/2 56076.92
6112.51 18337/3 38803.35
8718.92 34875/4 30192.08
11058.64 55293/5 25045.65
13154.09 78925/6 21631.54
15025.95 105181/7 19207.24
16693.22 133546/8 17401.48
18173.41 163561/9 16007.97
19482.62 194826/10 14902.95
P8 NPV
$927.31 27619.71
8000/(1.08)^28 SUM(P1:P8)

NPV
36484.9
SUM(P1:P8)

Maintenance+Annual Investment
800
400+50
267+100
200+150
160+200
133+250

nual Cost of Capital Recovery Total Equivalent Annual Cost


ment Cost*(1.08)^n* (0.08/(1.08^n-1)Annuity+EMAC

100000*1.08^1*(0.08/(1.08^1-1)) 108000
100000*1.08^2*(0.08/(1.08^2-1)) 59291.94
100000*1.08^3*(0.08/(1.08^3-1)) 44915.86
100000*1.08^4*(0.08/(1.08^4-1)) 38911
100000*1.08^5*(0.08/(1.08^5-1)) 36104.28
100000*1.08^6*(0.08/(1.08^6-1)) 34785.63
100000*1.08^7*(0.08/(1.08^7-1)) 34233.19
100000*1.08^8*(0.08/(1.08^8-1)) 34094.69
100000*1.08^9*(0.08/(1.08^9-1)) 34181.38
100000*1.08^10*(0.08/(1.08^10-1)) 34385.57
Cash Flow and Profitability Anaylysis of Chemical Plant

Porject Life: 2 years, construction


10 years, operation
Land cost 10 million
FCI, Year 1 90 million
FCI, Year 2 60 million
Working Capital 30 million
Revenue 95 pa, starting Year 3
Tax rate 45 %
Depreciation Begins Year 3, for 5 years, single declining (40%)
Salvage is BV
COM Cost of Manufacture 30

Year Capital Movement Depreciation Value


(Book Value *0.4)
0 -10 -10
1 -90 -90 0
2 -90 -60-30 0
3 60
4 36
5 21.6
6 12.96
7 7.78
8
9
10
11
12 30 WC

Sensitivity Analysis
NPV obtained by changing one variable and Finding

Variation in Revenue
-30% -20% -10%
Revenue 66.5 76 85.5
NPV (d(Revenue)) 37.7 74.3 110.89
Working Capital 21 24 27
NPV(d(Working Capital)) 150.64 149.59 148.54
Tax Rate 31.5 36 40.5
NPV((d(Tax Rate)) 195.24 179.32 163.4

Sensitivity Analysis

300
250 Revenue
Sensitivity Analysis

300
250 Revenue
200 Working
Capital
150
NPV

Tax Rate
100
50

-40% -30% -20% -10% 0% 10% 20% 30% 40%


% Change from Most Likely Value
nstruction

(recovered)

in Year 2
ng Year 3

ingle declining (40%)

tion Value Capital Book ValueRevenue COM Profit Before Tax


(Book Value *0.4) (BV-Dep) (Revenue-COM+CM)

90
150
150*0.4 90 95 30 65
90*0.4 54 95 30 65
54*0.4 32.4 95 30 65
32.4*0.4 19.44 95 30 65
19.44*0.4 11.66 95 30 65
11.66 95 30 65
11.66 95 30 65
11.66 95 30 65
11.66 95 30 65
11.66 95 30 86.66

0% 10% 20% 30%


95 104.5 114 123.5
147.49 184.08 220.68 257.27
30 33 36 39
147.49 146.44 145.39 144.33
45 49.5 54 58.5
147.49 131.57 115.65 99.73
rofit Before Tax Taxable Profit Tax Profit After (OCF)CF CCF
Revenue-COM+CM) (PBT-Dep) (TP*45%) (PBT-Tax) CF=CM+OCF SUM(CF)
-10 -10
-90 -100
-90 -190
95-30 5 2.25 62.75 62.75 -127.25
95-30 29 13.05 51.95 51.95 -75.3
95-30 43.4 19.53 45.47 45.47 -29.83
95-30 52.04 23.42 41.58 41.58 11.75
95-30 57.22 25.75 39.25 39.25 51
95-30 65 29.25 35.75 35.75 86.75
95-30 65 29.25 35.75 35.75 122.5
95-30 65 29.25 35.75 35.75 158.25
95-30 65 29.25 35.75 35.75 194
95-30+BV+LS 86.66 39 47.67 77.67 271.67
DCF Cumulative DCF
DCF=PV(CF)=CF/(1.05)^nSUM(DCF)
-10 -10
-85.71 -95.71
-81.63 -177.35
54.21 -123.14
42.74 -80.4
35.63 -44.77
31.03 -13.75
27.89 14.15
24.2 38.35
23.04 61.39
21.95 83.34
20.9 104.24
43.25 147.49

NPV 147.49
Plot cumulative discounted cash flow vs. time. Define the break-even point.

Year Cumulative DCF


SUM(DCF)
Cumulative DCF (NPV
0 -10
1 -95.71
2 -177.35 200
3 -123.14 150
4 -80.4 100 Cu
(N
5 -44.77 50 Re
6 -13.75
7 14.15 -50
8 38.35 -100
9 61.39
-150
10 83.34
-200
11 104.24
2 4 6 8 10 12 14
12 147.49

Calculate NPV for discount rates of 5, 10, 15,20, 25%


Change discount rate from 5%.
Note IRR when NPV=0

Conduct Sensitivity Analsyis

Sensitivity Analysis
NPV obtained by changing one variable and Finding

Variation in Revenue
-30% -20% -10% 0% 10% 20% 30%
Revenue 66.5 76 85.5 95 104.5 114 123.5
NPV (d(Revenue)) 37.7 74.3 110.89 147.49 184.08 220.68 257.27
Working Capital 21 24 27 30 33 36 39
NPV(d(Working Capital))
150.64 149.59 148.54 147.49 146.44 145.39 144.33
Tax Rate 31.5 36 40.5 45 49.5 54 58.5
NPV((d(Tax Rate))195.24 179.32 163.4 147.49 131.57 115.65 99.73

Sensitivity Analysis

300
Revenu
250 e
200 Working
Capital
150
NPV

Tax
100 Rate

50

-50% 0% 50%
% Change from Most Likely Value
50

-50% 0% 50%
% Change from Most Likely Value
ve DCF (NPV of Revenue)

Cumulative DCF
(NPV of
Revenue)

0 12 14