Base Case 1 2 3 4

Equipment Cost 3,400.0 Depreciation Rate 33% 45% 15% 7%

Salvage value 300.0 Units 550.0 572 594.88 618.6752
Units Sold Year 1 550.0 Price 11.6 11.832 12.06864 12.310013
Change in units sold 4% VC 6.0 6.12 6.2424 6.367248
Sales per unit Year 1 11.6 FC 2,000.0 2040 2080.8 2122.416
Change in sales price 2%
VC per unit Year 1 6.0
Change in VC per unit 2%
Fixed Cost Year 1 2,000.0 NPV 35.83654
Change in FC 2%
WACC 10%
Tax rate 40%
WC as % of expected sales 12.65%

0 1 2 3 4
Sales 6,380.00 6,767.90 7,179.39 7,615.90
Variable Cost (3,300.00) (3,500.64) (3,713.48) (3,939.26)
Fixed Cost (2,000.00) (2,040.00) (2,080.80) (2,122.42)
Tax Expense (432.00) (490.91) (554.05) (621.69)
After-tax Income 648.00 736.36 831.07 932.54
Depreciation Tax Savings 448.80 612.00 204.00 95.20
Investment cost (3,400.00)
Working Capital (807.07) (49.07) (52.05) (55.22) 963.41
After-tax Salvage Value 180.00
Net Cash Flows (4,207.07) 1,047.73 1,296.31 979.85 2,171.15

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Abandonment Option
Sample #1
Best Case 25% 13,379
Base Case 50% 35.84
Worst Case 25% -4,547
If abandon at 500
10%
0 1 2 3 4 NPV Probability
Best Case -3,812 3813 4634 5256 8705 13,378.66 25% 3344.6646
Base Case -4207.07 1047.730144 1296.3050968 979.85005 2171.1464 35.84 50% 17.91827
Worst Case -283 -64 -737 -410
-4703
-283 500 0 0 (4,547.05) 25% -1136.762
Project NPV 2,225.8

Sample #2
Cost 22,500
Cash Flow 6,250
Years 5
WACC 10%
Abandonment = Salvage Value

NPV: $1,192.42

The management has an option to cease the project when it thinks most beneficial. If the project
will be abandon at an earlier period the equipment can have an after-tax salvage value of 17,500,
14,000, 11,000, or 5,000 from year 1 to year 4, respectively.
Salvage Value 6250 17500
CF0 (22,500) NPV 6250 6250 14000
CF1 6,250 17,500 (909.09) -22500 6250 6250 6250 11000
CF2 6,250 14,000 (82.6446) 1590.91 6250 6250 6250 6250 5000

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Decision Tree
Marketing Management 100,000
WACC 10%

0 1 2 3 4 5 6 NPV
45% -3812 3813 4634 5256 8705 10,502.20
80% -500 40% -4207 1047.73 1296.305 979.85 2171.146 -524.87
-100 15% Stop 0 0 0 0 -554.55
20% 0 0 0 0 0 0 -100.00
Stop Project NPV
 Joint
Probability
36.00% 3780.791
32.00% -167.9586
12.00% -66.54545
20% -20
Project NPV 3526.287
Timing Option
Initial Investment 20,000,000.0
Cash Flows 3,000,000.0
Years 20
WACC 12%

NPV: $2,408,330.87 start at T=0

There is an existing bill for the new tax imposition and the management has an option to delay the project after the decision will be made on that bill which will be
1 year from now. If the tax will be imposed the expected cash flow will be $2.4 million, otherwise $3.2 million. There is a 25% probability the tax will be imposed.
TODAY
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
25% 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4
(20.0) 75% 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2

($2.07) Impose NPV

$3.90 Not Impose NPV
($1.85) 25% ($0.46)
$3.48 75% $2.61
Project NPV $2.15

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Expansion Option
Investment 750,000,000
Cash flow 85,000,000
Years 10
WACC 12%

NPV: (269,731,042.585076)

Management can decide to expand to possibility of generating greater cash flow.

Expansion cost 2,000,000,000.0
Cash flow 150,000,000.0
Years 15
NPV ($978,370,326.58)
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
-2000 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150
-750 85 85 85 85 85 85 85 85 85 85
-2750 235 235 235 235 235 235 235 235 235 235 150 150 150 150 150

Project NPV ($1,248.10)

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Production-Flexibility Option
Original Project source is coal.
Base Case NPV (400,000.0)
Management can switch between coal, natural gas, or oil as energy source.
Incremental Investment 300,000.0
Option value 1,200,000.0

Project NPV: 500,000.0

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