The Baldwin Company: An Example

Year 1 Year 2 Year 3 Year 4

Units sold per year: 5,000 8,000 12,000 10,000
Price per unit for Year 1: $ 20.00
Price increase per year: 2%
Inflation rate: 5%
Tax rate: 34%
Unit production cost for Year 1: $ 10.00
Increase in unit cost per year: 10%
NWC to start project: $ 10,000
NWC for subsequent years: 10%
Depreciation rate: 20.0% 32.0% 19.2% 11.5%
Cost of machine $ 100,000
Cost of warehouse: $ 150,000
Pretax salvage value: $ 30,000

Year 1 Year 2 Year 3 Year 4

Depreciation $ 20,000 $ 32,000 $ 19,200 $ 11,500
Accumulated depreciation 20,000 52,000 71,200 82,700
Adjusted basis of machine 80,000 48,000 28,800 17,300
Price per unit 20.00 20.40 20.81 21.22
Sales revenue 100,000 163,200 249,696 212,242
Cost per unit 10.00 11.00 12.10 13.31
Operating costs 50,000 88,000 145,200 133,100

Net working capital

Beginning NWC $ 10,000 $ 10,000 $ 16,320 $ 24,970
End of year NWC 10,000 16,320 24,970 21,224
NWC cash flow $ - $ (6,320) $ (8,650) $ 3,745

Pretax salvage value $ 30,000

Taxes on sale 8,228
Aftertax salvage value $ 21,772
Sales revenue $ 100,000 $ 163,200 $ 249,696 $ 212,242
Operating costs 50,000 88,000 145,200 133,100
Depreciation 20,000 32,000 19,200 11,500
Income before taxes $ 30,000 $ 43,200 $ 85,296 $ 67,642
Taxes at 34 percent 10,200 14,688 29,001 22,998
Net income $ 19,800 $ 28,512 $ 56,295 $ 44,643

Year 0 Year 1 Year 2 Year 3

Sales revenue $ 100,000 $ 163,200 $ 249,696
Operating costs 50,000 88,000 145,200
Taxes 10,200 14,688 29,001
Cash flow from operations $ 39,800 $ 60,512 $ 75,495
Bowling ball machine $ (100,000)
Warehouse (150,000)
Net working capital (10,000) - (6,320) (8,650)
Total cash flow of project $ (260,000) $ 39,800 $ 54,192 $ 66,846

NPV
4% $ 123,643
10% $ 51,590
15% $ 5,473
15.68% $ 0
20% $ (31,350)
 Year 5
6,000

11.5% (Modified Accelerated Cost Recovery System)

Year 5
$ 11,500
94,200
5,800
21.65
129,892
14.64
87,846

$ 21,224
-
$ 21,224
$ 129,892
87,846
11,500
$ 30,546
10,386
$ 20,160

Year 4 Year 5
$ 212,242 $ 129,892
133,100 87,846
22,998 10,386
$ 56,143 $ 31,660
21,772
150,000
3,745 21,224
$ 59,889 $ 224,656