Time

0 1 2 3 4 5 6

650000 38000 38000 38000 38000 38000 288000

558000

Step 1 = Time 0= Initial Cash Investment

Step 2= Time = 1 till 6 = Incremental /Subsequent Cash Flows

Step 3= Time 6 = Terminal Year Cash Flows

Expansion / Replacement

Step 1= Time 0= Initial Cash Investment

Expansion = Cost of Asset + Shipping Cost + Installment Cost + New Working Capital

= 400000 +100000+100000+ 50000

=650000

Replacement = Cost of Asset + Shipping Cost + Installment Cost + Additional Working Capital - Sale Price
of Old Asset + Tax on Capital Gain (-Tax on Capital Loss)

=4+1+1+0.5-0.7+0.08

=400000+100000+100000+20000-70000+8000 = 558000

Sale Price of Old Asset = MV-BV = 70000-50000= 20000 Capital Gain Tax 40% =8000 Tax on Capital Gain

Market Value= 70000

Book Value= 50,000

Sale Price of Old Asset = MV-BV = 30000-50000= -20000 Capital loss Tax 40% =8000 Tax on Capital Loss

Market Value= 30000

Book Value= 50,000

Step 2:

Time 1 till time 5= Subsequent Cash Flows

1 2 3 4 5 6

Sales 100000 100000 100000 100000 100000 100000

operating cost (50000)

Gross Profit 50000

Fixed Expenses 10000

EBDIT 40000

-Depreciation 33333

Earnings BIT 6666

Tax 40%(6666*0.4) 2666

Earnings 4666

Add Back Depreciation 33333

Cash Inflow 38000 38000 38000 38000 38000 38000

Depreciation = Cost – Salvage Value/ Useful Life

=400000 – 200000/6

=33333

Step 3: Time 6 = Terminal Cash Flows

= Net Cash Flow + Scrap/ Salvage Value+ Working Capital

=38000+200000 + 50000 =288000

PV= R/i

PV = DIV/KP

KP= DIV/MP

Ke =
D1 = D0(1+g)
Ke = (D1/MP ) +g
Kp = D0/MP

Do= 3
G=8%
MP = 64.80
Ke = D1/MP +g
D1 = Do (1+g)
D1= 3(1+0.08)
D1= 3(1.08)
Ke = 3(1.08)/64.80 + 0.08
Ke = 0.05+0.08
Ke =13%

WACC = Wd * Kd + Wp *Kp +We *Ke

WACC = 0.35 *0.06 + 0.15*0.09 + 0.5*0.13
= 0.021 + 0.0135 + 0.065
= 0.0995
= 10%