PIED PIPER, INC.

Year 0 1

Assumptions

Initial outlay Units

Purchase price of equipment Php M 500
Salvage value Php M 50
Useful life years 10
Expected proceeds from sale Php M 65
Increase in inventory Php M 150
Increase in payables Php M 25

Operational assumptions
Year 1 sales Php M 150
Sales annual growth % 7%
Cash variable costs (% of sales) % 20%
Year 1 cash fixed costs Php M 15
Fixed cost annual growth % 5%

Other assumptions
Tax rate % 25%
Hurdle rate % 14%

Calculations

Book value of equipment Units

Beginning value Php M 500
Capital expenditure Php M 500
Depreciation Php M 45
Ending value Php M 500 455

Initial cash flows

Fixed capital investment Php M (500)
Working capital investment Php M (125)
Total initial cash flow Php M (625)

Operational assumptions
Sales Php M 150
Cash variable costs Php M (30)
Cash fixed costs Php M (15)
Depreciation Php M (45)
EBIT Php M 60
Less: Taxes Php M (15)
 Add: Depreciation Php M 45
After-tax operating cash flow Php M 90

Terminal cash flow

Proceeds from sale Php M 65
Tax on sale of equipment Php M (4)
Recovery of working capital Php M 125
Terminal cash flow Php M 186

Total cash flows Php M (625) 90

Present value of cash flow Php M (625) 79

NPV Method 1 Php M 17.32

NPV Method 2 Php M 17.32

Internal rate of return % 14.59%

Sensitivity analysis

NPV: Sales growth rate and hurdle rate

Annual sales growth rate
17.32 5% 6%
12%
Hurdle rate

13%
14%
15%
16%

IRR: Sales growth rate and hurdle rate

Annual sales growth rate
14.59% 5% 6%
10%
(as % of sales)
Variable cost

15%
20%
25%
30%
 2 3 4 5 6 7 8

455 410 365 320 275 230 185

45 45 45 45 45 45 45
410 365 320 275 230 185 140

160.50 171.74 183.76 196.62 210.38 225.11 240.87

(32) (34) (37) (39) (42) (45) (48)
(16) (17) (17) (18) (19) (20) (21)
(45) (45) (45) (45) (45) (45) (45)
68 76 85 94 104 115 127
(17) (19) (21) (24) (26) (29) (32)
 45 45 45 45 45 45 45
96 102 108 116 123 131 140

96 102 108 116 123 131 140

74 69 64 60 56 52 49

Annual sales growth rate

7% 8% 9%

Annual sales growth rate

7% 8% 9%
 9 10

140 95

45 45
95 50

257.73 275.77
(52) (55)
(22) (23)
(45) (45)
139 152
(35) (38)
 45 45
149 159

149 346

46 93
PIED PIPER, INC.

Year 0 1

Assumptions

Active Scenario assumptions

Initial outlay Units Conservative Base
Purchase price of equipment Php M 500 500
Salvage value Php M 50 50
Useful life years 10 10
Expected proceeds from sale Php M 65 65
Increase in inventory Php M 150 150
Increase in payables Php M 25 25

Operational assumptions
Year 1 sales Php M 125 150
Sales annual growth % 5% 7%
Cash variable costs (% of sales) % 22% 20%
Year 1 cash fixed costs Php M 15 15
Fixed cost annual growth % 5% 5%

Other assumptions
Tax rate % 25% 25%
Hurdle rate % 16% 14%

Calculations

Active scenario

Book value of equipment Units

Beginning value Php M
Capital expenditure Php M
Depreciation Php M
Ending value Php M

Initial cash flows

Fixed capital investment Php M
Working capital investment Php M
Total initial cash flow Php M

Operational assumptions
Sales Php M
Cash variable costs Php M
 Cash fixed costs Php M
Depreciation Php M
EBIT Php M
Less: Taxes Php M
Add: Depreciation Php M
After-tax operating cash flow Php M

Terminal cash flow

Proceeds from sale Php M
Tax on sale of equipment Php M
Recovery of working capital Php M
Terminal cash flow Php M

Total cash flows Php M

Present value of cash flow Php M

NPV Method 1 Php M

NPV Method 2 Php M

Internal rate of return %

Scenario analysis

Conservative Base
NPV
IRR
 2 3 4 5 6 7 8

o assumptions
Optimistic
500
50
10
65
150
25

175
9%
18%
15
5%

25%
12%
Optimistic
9 10