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Exercise

1 Data :
Machine Price / Investment
Depreciation
Cash Cost Saving
Selling Price
Tax on Gain of Machine Sale
Tax Rate
Discount rate
Solution :
Cash Flow
Year
Investment
Cash Cost Saving
Depreciation
EBIT
Taxes
Net Income
Depreciation
OCF
After Tax Salvage Value
After Tax Total Net CF
Present Value
NPV
IRR
Payback Period

0
(500,000.00)

(500,000.00)
(500,000.00)
(500,000.00)
(500,000.00)
(500,000.00)
169,459.85
20%
3.13

1
200,000.00
(100,000.00)
100,000.00
40,000.00
60,000.00
100,000.00
160,000.00
160,000.00
148,148.15

(500,000.00)
(100,000.00)
200,000.00 per year
75,000.00
40%
40%
8%

200,000.00
(100,000.00)
100,000.00
40,000.00
60,000.00
100,000.00
160,000.00

200,000.00
(100,000.00)
100,000.00
40,000.00
60,000.00
100,000.00
160,000.00

200,000.00
(100,000.00)
100,000.00
40,000.00
60,000.00
100,000.00
160,000.00

160,000.00
137,174.21

160,000.00
127,013.16

160,000.00
117,604.78

200,000.00
(100,000.00)
100,000.00
40,000.00
60,000.00
100,000.00
160,000.00
45,000.00
205,000.00
139,519.56

Salvage Value

2 Data :
Machine A Price
Lifetime
Salvage Value
Depreciation
Tax

(300,000.00)
15 years
20,000 per year
40%

Machine B Price
Lifetime
Salvage Value
Saving of Labor
Out of Pocket Cash Saving
Saving by space
Depreciation
Discount Rate
Book value
Sell price of old machine
Solution :

(480,000.00)
12 years
135,000.00 per year
25,000.00 per year
3,000.00 per year
40,000 per year
7%
240,000.00
100,000.00

Scenario 1 - Continue using existing machine


Year
Depreciation
Tax Shield
CF
PV
NPV

$
$
$
$
$

1
4
20,000.00
8,000.00
8,000.00
7,476.64
63,541.49

$
$
$
$

2
5
20,000.00
8,000.00
8,000.00
6,987.51

Scenario 2 - Replace existing machine after three years


Year
Investment
Sale of old machine
Saving of Labor
Out of Pocket Cash Saving
Saving by space
Depreciation
Loss on Sale
EBIT
Income tax
Net income
add: depreciation
add: loss on sale
OCF
PV
NPV

0
$ (480,000.00)
$ 100,000.00

$ 135,000.00
$
25,000.00
$
3,000.00
$
(40,000.00)
$ (140,000.00)
$
(17,000.00)
$
(6,800.00)
$
(10,200.00)
40,000
140,000.00
$ (380,000.00) $ 169,800.00
$ (380,000.00) 158691.588785
$ 576,214.15

$
$
$
$

3
6
20,000.00
8,000.00
8,000.00
6,530.38

$
$
$
$

4
7
20,000.00
8,000.00
8,000.00
6,103.16

$
$
$
$

5
8
20,000.00
8,000.00
8,000.00
5,703.89

$
$
$
$

6
9
20,000.00
8,000.00
8,000.00
5,330.74

$ 135,000.00 $
$ 25,000.00 $
$
3,000.00 $
$ (40,000.00) $

135,000.00
25,000.00
3,000.00
(40,000.00)

$ 135,000.00 $ 135,000.00
$ 25,000.00 $ 25,000.00
$
3,000.00 $
3,000.00
$ (40,000.00) $ (40,000.00)

$ 123,000.00 $
$ 49,200.00 $
$ 73,800.00 $
40,000

123,000.00 $ 123,000.00 $ 123,000.00


49,200.00 $ 49,200.00 $ 49,200.00
73,800.00 $ 73,800.00 $ 73,800.00
40,000
40,000
40,000

$ 113,800.00 $
99397.327277

113,800.00 $ 113,800.00 $ 113,800.00


92894.698390179 86817.475131 81137.827225

$
$
$
$

7
10
20,000.00
8,000.00
8,000.00
4,982.00

$
$
$
$

8
11
20,000.00
8,000.00
8,000.00
4,656.07

$ 135,000.00 $ 135,000.00
$ 25,000.00 $ 25,000.00
$
3,000.00 $
3,000.00
$ (40,000.00) $ (40,000.00)

$
$
$
$

9
12
20,000.00
8,000.00
8,000.00
4,351.47

$
$
$
$

10
13
20,000.00
8,000.00
8,000.00
4,066.79

$
$
$
$

11
14
20,000.00
8,000.00
8,000.00
3,800.74

10

$ 135,000.00 $ 135,000.00
$ 25,000.00 $ 25,000.00
$
3,000.00 $
3,000.00
$ (40,000.00) $ (40,000.00)

$ 135,000.00
$ 25,000.00
$
3,000.00
$ (40,000.00)

$ 123,000.00 $ 123,000.00 $ 123,000.00 $ 123,000.00 $ 123,000.00


$ 49,200.00 $ 49,200.00 $ 49,200.00 $ 49,200.00 $ 49,200.00
$ 73,800.00 $ 73,800.00 $ 73,800.00 $ 73,800.00 $ 73,800.00
40,000
40,000
40,000
40,000
40,000
$ 113,800.00 $ 113,800.00 $ 113,800.00 $ 113,800.00 $ 113,800.00
75829.74507 70868.920626
66232.6361 61899.659906 57850.149445

$
$
$
$

12
15
20,000.00
8,000.00
8,000.00
3,552.10

11

12

$ 135,000.00 $ 135,000.00
$ 25,000.00 $ 25,000.00
$
3,000.00 $
3,000.00
$ (40,000.00) $ (40,000.00)
$ 123,000.00 $ 123,000.00
$ 49,200.00 $ 49,200.00
$ 73,800.00 $ 73,800.00
40,000
40,000
$ 113,800.00 $ 113,800.00
54065.560229 50528.560962

Units
Unit price
Capex
Depreciation
Changes in working capital

Period

1998
1000
20.00 $
400
1057
-108

Sales
COGS
depreciation
Selling, general & adm
EBIT
income tax
Net income
Add: depreciation
OCF
Less: Capex
Changes in WC
FCF
PV
npv

$
$
$
$
$
$
$
$
$
$
$
$
$
$

20,000.00
10,000.00
1,057.00
7,000.00
1,943.00
777.20
1,165.80
1,057.00
2,222.80
400.00
(108.00)
1,714.80
1,531.07
8,846.23

If we discontinued at 1998
Recovery of WC
sale of fixed assets
tax shield
PV of CF

$
$
$
$

3,592.00
3,000.00
1,600.00
8,192.00

1999
1000
20.60
400
1124
-111

2
$
$
$
$
$
$
$
$
$
$
$
$
$

20,600.00
10,300.00
1,124.00
7,210.00
1,966.00
786.40
1,179.60
1,124.00
2,303.60
400.00
(111.00)
1,792.60
1,429.05

2000
1000
21.00 $
400
1204
-79

3
$
$
$
$
$
$
$
$
$
$
$
$
$

21,000.00
10,609.00
1,204.00
7,426.30
1,760.70
704.28
1,056.42
1,204.00
2,260.42
400.00
(79.00)
1,781.42
1,267.98

2001
1000
21.15 $
400
1304
-40

4
$
$
$
$
$
$
$
$
$
$
$
$
$

21,150.00
10,927.27
1,304.00
7,649.09
1,269.64
507.86
761.78
1,304.00
2,065.78
400.00
(40.00)
1,625.78
1,033.22

2002
1000
21.25 $
300
1404
-33

5
$
$
$
$
$
$
$
$
$
$
$
$
$

21,250.00
11,255.09
1,404.00
7,878.56
712.35
284.94
427.41
1,404.00
1,831.41
300.00
(33.00)
1,498.41
850.24

2003
1000
21.25
200
1504
-17

6
$
$
$
$
$
$
$
$
$
$
$
$
$

21,250.00
11,592.74
1,504.00
8,114.92
38.34
15.34
23.00
1,504.00
1,527.00
200.00
(17.00)
1,310.00
663.69

2004
1000
21.00 $
0
1504
23

2005
0
19.00

1000
3957

7
$
$
$
$
$
$
$
$
$
$
$
$
$

21,000.00
11,940.52
1,504.00
8,358.37
(802.89)
(321.16)
(481.73)
1,504.00
1,022.27
23.00
1,045.27
472.83

8
$

$
$
$
$
$
$
$

tax
discount rate

3,957.00
3,957.00
1,598.17

40%
12%

Units
Unit Price

working capital
changes

Investment
Sales
COGS
depreciation
Selleing, gen & adm
Special promotion
EBIT
Tax
Net income
Add: depreciation
Changes in WC
FCF
PV
NPV

1998
250
20.00 $

1999
250
20.60 $

2000
250
21.00 $

2001
250
21.15

1998
925
0

1999
953
-28

2000
973
-20

2001
983
-10

1
1998

2
1999

3
2000

5,150.00
2,575.00
200.00
1,288.00
1,000.00
87.00
34.80
52.20
200.00
(28.00)
224.20
178.73

$ 5,250.00
$ 2,652.00
$
200.00
$ 1,326.00
$
500.00
$
572.00
$
228.80
$
343.20
$
200.00
$
(20.00)
$
523.20
$
372.40

$ (1,400.00)
$
$
$
$
$
$
$
$
$
$
$ (1,400.00) $
$ (1,400.00) $
$ 1,246.88

5,000.00
2,500.00
200.00
1,250.00
1,000.00
50.00
20.00
30.00
200.00
230.00
205.36

$
$
$
$
$
$
$
$
$
$
$
$

2002
250
21.25 $

2003
250
21.25 $

2004
250
21.00 $

2005
0
19.00

2002
991
-8

2003
995
-4

2004
989
6

2005
0
989

4
2001

5
2002

6
2003

7
2004

$ 5,287.50 $ 5,312.50
$ 2,732.00 $ 2,814.00
$
200.00 $
200.00
$ 1,366.00 $ 1,407.00

$ 5,312.50 $ 5,250.00
$ 2,898.00 $ 2,985.00
$
200.00 $
200.00
$ 1,449.00 $ 1,493.00

$
$
$
$
$
$
$

$
$
$
$
$
$
$

989.50
395.80
593.70
200.00
(10.00)
783.70
498.06

$
$
$
$
$
$
$

891.50
356.60
534.90
200.00
(8.00)
726.90
412.46

765.50
306.20
459.30
200.00
(4.00)
655.30
332.00

$
$
$
$
$
$
$

investment
n
depreciation
Tax
discount rate

8
2005

572.00
228.80
343.20
200.00
6.00 $ 989.00
549.20 $ 989.00
248.43 $ 399.44

1400
7
200
40%
12%

Investment
Total cost
discount rate

$
$

350,000,000.00
80,000,000.00
13%

Year
Investment
Total Cost
CF (most likely)
OCF
PV
NPV

0
1
$ (350,000,000.00)
$ (80,000,000.00)
$
$ (430,000,000.00) $
$ (430,000,000.00) $
$ (113,343,437.66)

Year
Investment
Total Cost
CF (Highly successful)
OCF
PV
NPV

0
1
$ (350,000,000.00) $ (350,000,000.00)
$ (80,000,000.00)
$
98,000,000.00
$ (430,000,000.00) $ (252,000,000.00)
$ (430,000,000.00) $ (223,008,849.56)
$ (106,421,388.59)

Year
Investment
Total Cost
CF (worst case)
OCF
PV
NPV

0
1
$ (350,000,000.00) $
$ (80,000,000.00)
$
$ (430,000,000.00) $
$ (430,000,000.00) $
$ (279,557,522.12)

49,000,000.00
49,000,000.00
43,362,831.86

170,000,000.00
170,000,000.00
150,442,477.88

$ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00


$ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00
$ 38,374,187.49 $ 33,959,457.95 $ 30,052,617.66 $ 26,595,236.86

$ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00


$ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00
$ 76,748,374.97 $ 67,918,915.90 $ 60,105,235.31 $ 53,190,473.73

$ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00


$ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00
$ 23,535,607.84 $ 20,827,971.54 $ 18,431,833.22 $ 16,311,356.84

$ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00


$ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00
$ 47,071,215.69 $ 41,655,943.09 $ 36,863,666.45 $ 32,622,713.67

10

11

12

13

$ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00


$ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00 $ 49,000,000.00
$ 14,434,829.06 $ 12,774,185.01 $ 11,304,588.50 $ 10,004,060.62

10

11

12

13

$ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00


$ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00 $ 98,000,000.00
$ 28,869,658.12 $ 25,548,370.01 $ 22,609,177.00 $ 20,008,121.24

14

15

$ 49,000,000.00 $ 49,000,000.00
$ 49,000,000.00 $ 49,000,000.00
$
8,853,150.99 $
7,834,646.90

14

15

$ 98,000,000.00 $ 98,000,000.00
$ 98,000,000.00 $ 98,000,000.00
$ 17,706,301.98 $ 15,669,293.79

a
CF
d
PV of Perpetuity

b
$

100,000.00
10%
$ 1,000,000.00

CF
d
n
PV of Perpetuity

CF
d
g
n
PV of Perpetuity

c
CF
d
g
PV of Perpetuity

50,000.00
10%
4%
833,333.33

b
$ 100,000.00
10%
4
$ 683,013.46
d
$

50,000.00
10%
4%
4
$ 569,177.88

Tax

35%

g
inflation
discount rate

4%
2%
10%
1
1999
61,000.00
29,890.00
4,000.00
21,010.00
6,100.00
2,135.00
3,965.00
4,000.00
7,965.00
4,938.00
(516.00)
2,511.00
2,511.00
2,414.42
124,050.96

Sales
COGS
Depreciation
Selling & adm
EBIT
Tax
Net income
Add: depreciation
OCF
Less: capex
changes in WC
FCF
FCF to infinity
PV
NPV

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

Maximum price Lycos should to pay

$ 124,050,956.15

$
$
$
$
$
$
$
$
$
$
$
$
$
$

2
2000
63,440.00
30,768.00
4,160.00
21,570.00
6,942.00
2,429.70
4,512.30
4,160.00
8,672.30
5,136.00
(537.00)
2,999.30
2,999.30
2,773.02

$
$
$
$
$
$
$
$
$
$
$
$
$
$

3
2001
65,978.00
31,669.00
4,326.00
22,103.00
7,880.00
2,758.00
5,122.00
4,326.00
9,448.00
5,341.00
(558.00)
3,549.00
3,549.00
3,155.05

$
$
$
$
$
$
$
$
$
$
$
$
$
$

4
2002
68,617.00
32,593.00
4,499.00
22,232.00
9,293.00
3,252.55
6,040.45
4,499.00
10,539.45
5,555.00
(581.00)
4,403.45
4,403.45
3,764.09

$
$
$
$
$
$
$
$
$
$
$
$
$
$

5
2003 to infinity
71,361.00
33,896.00
4,679.00
22,407.00
10,379.00
3,632.65
6,746.35
4,679.00
11,425.35
5,777.00
(604.00)
5,044.35 $ 131,153.10
136,197.45
111,944.38