Asset $ 100,000.00 Market Value $ 40,000.

00
Delivery & Installation $ 10,000.00 taxes $ 16,000.00
Economic life 5 asset $ 24,000.00
nwc $ 20,000.00
revenue 1st year $ 260,000.00 Depreciation Table
sales growth 3% Year 3-year
COGS 70% 1 0.333
G&A $ 25,000.00 2 0.445
revenue 1st year $ 260,000.00 3 0.148
tax 40% 4 0.074
wacc 9% 5
6
asset $ 110,000.00 7
8
9
10
11

0 1 2 3
Revenue $ - $ 260,000.00 $ 267,800.00 $ 275,834.00
Less COGS $ - $ 182,000.00 $ 187,460.00 $ 193,083.80
Legs G&A $ - $ 25,000.00 $ 25,000.00 $ 25,000.00
EDBT $ - $ 53,000.00 $ 55,340.00 $ 57,750.20
Less Depreciation $ - $ 36,630.00 $ 48,950.00 $ 16,280.00
EBT $ - $ 16,370.00 $ 6,390.00 $ 41,470.20
Taxes $ - $ 6,548.00 $ 2,556.00 $ 16,588.08
NI $ - $ 9,822.00 $ 3,834.00 $ 24,882.12
Add Depreciation $ - $ 36,630.00 $ 48,950.00 $ 16,280.00
OCF $ - $ 46,452.00 $ 52,784.00 $ 41,162.12
Asset -$ 110,000.00 $ - $ - $ -
NWC -$ 20,000.00 $ - $ - $ -
Period Cash Flows -$ 130,000.00 $ 46,452.00 $ 52,784.00 $ 41,162.12

Cost of Capital 9%
NPV $ 69,819.69
PI 1.54
IRR 26.73%
 A company is considering the purchase of a new mach
sales. The machine will have a price of $100,000. In a
tested. The costs of installation and testing will amoun
depreciated using 3-years MACRS. (Use MACRS table f
and pasting it)
5-year 7-year 10-year
0.2 0.143 0.1 The equipment will be operated for 5 years. The sales
0.32 0.245 0.18 be $260,000. Then, sales will grow by 3% a year. The a
will consist of fixed operating costs of $25,000 plus var
0.192 0.175 0.144
0.115 0.125 0.115 To support the increased level of production, the inven
increased from $30,000 to $50,000 when the machine
0.115 0.089 0.092 be carried until the machine is scrapped following the
0.058 0.089 0.074
At the end of the 5-year operating life of the project, it
0.089 0.066 for $40,000.
0.045 0.066 The tax rate is 40% and the company’s weighted avera
0.065 Build a capital budgeting model to answer the followin
0.065
1) What is the operating cash flow in year 1-5?
0.033 2) What is the initial outlay in year 0?
3) What is the after tax salvage at the terminal year?
4) Calculate NPV and PI for the project.
4 5
$ 284,109.02 $ 292,632.29
$ 198,876.31 $ 204,842.60 Check points:
NI in year 2 = $3,834
$ 25,000.00 $ 25,000.00 IRR = 26.73%
$ 60,232.71 $ 62,789.69
$ 8,140.00 $ -
$ 52,092.71 $ 62,789.69
$ 20,837.08 $ 25,115.87
$ 31,255.62 $ 37,673.81
$ 8,140.00 $ -
$ 39,395.62 $ 37,673.81
$ - $ 24,000.00
$ - $ 20,000.00
$ 39,395.62 $ 81,673.81
nsidering the purchase of a new machine that will enable it to increase its expected
ne will have a price of $100,000. In addition, the machine must be installed and
of installation and testing will amount to $10,000. The machine will be
g 3-years MACRS. (Use MACRS table from class excel exercise by copying the table

ill be operated for 5 years. The sales in the first year of operation are expected to
en, sales will grow by 3% a year. The annual operating costs (before depreciation)
d operating costs of $25,000 plus variable operating costs equal to 70% of sales.

creased level of production, the inventory of raw materials will have to be

30,000 to $50,000 when the machine is purchased. The additional inventory will
he machine is scrapped following the 5 years of operation.

5-year operating life of the project, it is assumed that the equipment will be sold
% and the company’s weighted average cost of capital is 9%.

dgeting model to answer the following questions:

erating cash flow in year 1-5?

tial outlay in year 0?
fter tax salvage at the terminal year?
and PI for the project.

834