1.

) Identify all the relevant cash flows

Answer: Below relevant cash flows are identified initially for the project

1. Initial investment in Building for factory(millions) = 150 million

2. Initial investment in equipment and installing the equipment for factory(millions) = 15+5 =20
million
3. Inventory = 15 million
4. Accounts payable = 5 million

2.) What is the project’s initial investment?

Amount in million
Relevant investment for starting the project $
Initial investment in building for factory(millions) -150
Initial investment in equipment for factory(millions) -20
Inventory -15
Accounts payable 5
Total initial investment- -180

4. What are the project’s terminal cash flows?

Terminal cash flows

Salvage value of the Factory 102
Adjusted basis of factory after depreciation 112.35
Taxable amount(change in salvage value and actual
value) -10.35
Tax @40% -4.14
Total sale value of factory(A) 106.14
Salvage value of the Equipment 3
Adjusted basis of Equipment after depreciation 0
Taxable amount(change in salvage value and actual
value) 3
Tax @40% 1.2
Total sale value of Equipment(B) 1.8
Reversal of Net working Capital(C) 20.75
Total Termination Amount(A+B+C) 128.69
3.) What are the project’s annual net operating cash flows for the year (2013-2018)?
Annual operating Cash flows
Description Year 2012 Year 2013 Year 2014 Year 2015 Year 2016 Year 2017 Year 2018
Investments in millions
Building a Factory -150.00 106.14
Depreciation Percentage 2.60% 5.00% 4.70% 4.50% 4.30% 4.00%
Depreciation 3.9 7.5 7.05 6.75 6.45 6
Accumulated Depreciation 3.9 11.4 18.45 25.2 31.65 37.65
Adjusted Basis of Factory Depreciation 146.10 138.60 131.55 124.80 118.35 112.35

Equipment+installation -20.00 1.8

Depreciation Percentage 20% 32% 19% 12% 11% 6%
Depreciation 4 6.4 3.8 2.4 2.2 1.2
Accumulated depreciation 4 10.4 14.2 16.6 18.8 20
Adjusted Basis of Equipment depreciation 16 9.6 5.8 3.4 1.2 0
Inventory(25 % variable cost) -15.00 -26.54
Accounts Payable(20 % of variable cost) 5.00 -21.23
Accounts Receivable( 8 % revenue) -15.44
Net Working Capital (end of year) -10.00 -20.75
change in networking capital 10.00 10.75

Total Initial Investment -180.00

Total Payback((salvage values of factory and
equipment )+ reversal in NWC) 128.69

Revenue from each pair 190 190 190 190 190 190
Number of Pairs sold 1.2 1.6 1.4 2.4 1.8 0.9
Total Revenue 193 289 266 456 342 171
Variable cost percentage 55% 55% 55% 55% 55% 55%
Variable Cost ($106.15) ($158.95) ($146.30) ($250.80) ($188.10) ($94.05)
Advertisement and Promotion Cost ($25.00) ($15.00) ($10.00) ($20.00) ($25.00) ($15.00)
Endorsement cost ($2.00) ($2.00) ($2.00) ($2.00) ($2.00) ($2.00)
Administrative Selling and general Expenses ($7.00) ($7.00) ($7.00) ($7.00) ($7.00) ($7.00)
Bonus $0.00 $0.00 $0.00 ($1.00) $0.00 $0.00
Depriciation of Building ($3.90) ($7.50) ($7.05) ($6.75) ($6.45) ($6.00)
Depriciation of Equipment ($4.00) ($6.40) ($3.80) ($2.40) ($2.20) ($1.20)
Total Expense ($148.05) ($196.85) ($176.15) ($289.95) ($230.75) ($125.25)
EBIT $44.95 $92.15 $89.85 $166.05 $111.25 $45.75
Interest Expense ($1.20) ($1.20) ($1.20) ($1.20) ($1.20) ($1.20)
EBT $43.75 $90.95 $88.65 $164.85 $110.05 $44.55
Income Tax Percentage -40% -40% -40% -40% -40% -40%
Income Tax Expense ($17.50) ($36.38) ($35.46) ($65.94) ($44.02) ($17.82)
PAT $26.25 $54.57 $53.19 $98.91 $66.03 $26.73

Total cash flow from

operations(PAT+Depreciation - change in
NWC) -180 $23.40 $68.47 $64.04 $108.06 $74.68 $162.62
 5. Evaluate the project using the NPV, IRR, Payback, PI and discounted payback methods.
A. Net present value = -180 + (23.40/1.11) + (68.47/(1.11^2)) + (64.04/(1.11^3)) +
(108.06/1.11^4) + (74.68/1.11^5) + (162.62/1.11^6)
Net present value = 145.92
IRR = excel formula IRR(-180,23.40,68.47,64.04,108.06,74.68,162.62)
= 30%
Profitability index = 23.40/1.11) + (68.47/(1.11^2)) + (64.04/(1.11^3)) + (108.06/1.11^4)
+ (74.68/1.11^5) + (162.62/1.11^6)/180
= 1.81

  2013 2014 2015 2016 2017 2018

cash flows 23.4025 68.47 64.04 108.06 74.68 162.6175
discount 11% 11% 11% 11% 11% 11%
present value $21.08 $61.68 $57.69 $97.35 $67.28 $146.50

Payback period = 3 years and 3 months (180 million (23.40(first year)+68.47(second year)
+64.04(third year) + 25.05(fourth year 3 months))
Discounted payback period = 3 years and 5 months