Yankay Specialty MEtals Corportation is reviewingan investment proposal.

The initial cost as well as the estimate of

the book value of the investment at the end of each year, the net after tax cash flows for each year, and the net income
for each year are presented in the following schedule. the salvage value of the investment at the end of each year is
equal to its book value. There should be no salvage value at the end of the investment's life.

source of data Financial CAshFlow Profit/ Loss

Position Statement
Statement
Year Initial Cost Annual Net Annual Net monthly
and Book After Tax Cash Income cashflow
Value flows
0 $ 1,050,000
1 $ 700,000 $ 500,000 $ 150,000 41,666.67
2 $ 420,000 $ 450,000 $ 170,000 37,500.00
3 $ 210,000 $ 400,000 $ 190,000 33,333.33
4 $ 70,000 $ 350,000 $ 210,000 29,166.67
5 $ - $ 300,000 $ 230,000 25,000.00

Managment uses a 16% after tax target rate of return (RRR) for new investment proposals.

Assumption : Assume that the cash flows in years 1 to 5 occur uniformly throughout the year.
Scenario I: Paybank PEriod

How long does it takes to fully recover the initial investment, ignoring the present value factor (time factor)?
Year Paybank
Period (year)
Initial Investment 0 $ (1,050,000)
less: Annual Net After Tax Cash 1 $ 500,000 1 year
flows
$ (550,000)
less: Annual Net After Tax Cash 2 $ 450,000 1 year
flows
$ (100,000)
less: Annual Net After Tax Cash 3 $ 100,000 0.25 year 3 months
flows
Full Recovery $ -

Payback Period 2.25 years to recoup initial investment

2 years and 3 months to recoup initial investment

Analytical Review:

Ignoring the Present Value factor, the company is expected to fully recover the initial invesment in 2.25 years based on
the projected net cash flow.
Scenario II:

What is the rate of return ignoring the time value for money. ARR?

Average Net $ 190,000

Income
Accounting rate of return = Initial = $ 1,050,000 = 18%
Investment

Year Annual Net Average Net

Income Income
1 $ 150,000
2 $ 170,000
3 $ 190,000
4 $ 210,000
5 $ 230,000
$ 950,000 $ 190,000

Analytical Review:

The Investment is expected to have accounting rate of return of 18%. The investment is considered worthy as the ARR is
above the expected rate of return (16%), however, ARR ignored the time value factor, hence further analysis need to be
done, such as NPV analysis
Scenario III:

What is the Net Present Values of the initial investments.

Target rate of return 16%

Year After Tax Cash Discount NPV

Flow Factor @ RoR
= 16%

Initial Investment 0 $ (1,050,000) 1.000 $ (1,050,000)

Net Cash Inflow 1 $ 500,000 0.862 $ 431,034
2 $ 450,000 0.743 $ 334,423
3 $ 400,000 0.641 $ 256,263
4 $ 350,000 0.552 $ 193,302
5 $ 300,000 0.476 $ 142,834
Net Present Value $ 950,000 $ 307,857 positive

Analytical Review:

The investment is shown worthy as the NPV is a positive at $307,857, however this decision is based on the assumption
that net cash inflow is reliable.

Scenario IV:

What is the internal rate of return (IRR) with time?

 Initial Cost of $ 1,050,000
Investment

Internal rate of return = Annual = $ 400,000 = 2.63

Incremental
Benefit

similar to yearly
net profit

Target rate of return 16% compounding interest

Year Annual Net Average Net

Income Income
0 $ (1,050,000) IRR = 29%
1 $ 500,000 IRR = more 20%
2 $ 450,000
3 $ 400,000
4 $ 350,000
5 $ 300,000
$ 2,000,000 $ 400,000
Analytical Review:

The anticipated rate of return showed the IRR value (29%), which factored in the time value for money, on average.
Hence, the investment is proven to be able to achieve the expected return (16%), with time value for money.

Scenario V:

What is the economic value of return (EVA)?

Scenario V:

What is the economic value of return (EVA)?

Economic Value Added = After Tax X (WACC - CE)

Operating
Income
= $ 2,000,000 X 0.48
= $ 952,226 initial
investment

Year Annual Net invest / reject?

Income
1 $ 500,000
2 $ 450,000
3 $ 400,000
4 $ 350,000
5 $ 300,000
After Tax Operating Income $ 2,000,000

WACC = Cost of Debt = 16% Kd + Ke = Cost of Capital

n = 5
present value discount rate = 0.48
proposal. The initial cost as well as the estimate of
er tax cash flows for each year, and the net income
value of the investment at the end of each year is
d of the investment's life.

investment proposals.

mly throughout the year.

g the present value factor (time factor)?

recover the initial invesment in 2.25 years based on

The investment is considered worthy as the ARR is
time value factor, hence further analysis need to be
, however this decision is based on the assumption
 not IRR, compounding
interest value

=1-(1+r)-n 3.27 RRR

r

approach B
approach A
ctored in the time value for money, on average.
urn (16%), with time value for money.
$ 1,050,000

REJECT EVA<Initial Investment

 Adams County's Board of Representatives is considering the construction of a longer runway at the county airport.
Currently, the airport can handle only private aircraft and small commuter jets. A new, long runway would enable
the airport to handle the midsize jets used many domestic flights. Data pertient to the board's decision appear
below

Cost of acquiring additional land for $ 700,000 CAPEX

runway
Cost of runway construction $ 2,000,000 CAPEX
Cost of extending perimeter fence $ 298,400 CAPEX
Cost of runway lights $ 396,000 CAPEX
Annual cost of maintaining new runway $ 280,000 OPEX
Annual incremental revenue from $ 400,000 REVENUE-OPEX
landing fees

In addition to the preceding data, two other facts are relevant to the decisions.

First, a longer runway will required a new snowplow, which will cost $1,000,000. (CAPEX)

The old snowplow could be sold now for $100,000. (CAPEX-REVENUE)

The new, larger plow will cost $120,000 more in annual operating costs. (OPEX)

Second, the County Board Representatives believes that the proposed long runway, and the major jet service it will
bring to the county, will increase economic activity in the community.

The board projects that the increased economic activity will result in $640,000 per year in additional tax revenue
for the county. (OPEX - REVENUE)

In analyzing the runway proposal, the board has decided to use a 10 year time horizon. the county's hurdle rate for
capital project is 12%.
for the county. (OPEX - REVENUE)

In analyzing the runway proposal, the board has decided to use a 10 year time horizon. the county's hurdle rate for
capital project is 12%.
Scenario I:

What is the total initial cost of investment? CAPEX

Initial Costs: Costs

Cost of acquiring additional land for $ 700,000
runway
Cost of runway construction $ 2,000,000
Cost of extending perimeter fence $ 298,400
Cost of runway lights $ 396,000
New Snowplow 1 $ 1,000,000
$ 4,394,400
less: Salvage Value of old Snowplow $ 100,000
Total Initial Costs $ 4,294,400 TOTAL NET CAPEX
Scenario II:

What is the annual net cost or benefit from the runway? OPEX annual

Annual Net Benefit/ (Cost)

Inflow:
Annual incremental revenue from $ 400,000
landing fees
Additional tax revenue $ 640,000
$ 1,040,000
less: Outflow:
Annual cost of maintaining new runway $ 280,000
annual operating costs $ 120,000
$ 400,000

Annual Net Benefit/(Cost) $ 640,000

Scenario III:

What is the Internal Rate of Return?

Initial Cost of Investment

Annuity discount factor associated  with
the internal rate of return
=
Annual Incremental Benefit
 $ 4,294,400
=
$ 640,000

= 6.71

years = 10

Interest Rate = 8%
 Yankay Specialty MEtals Corporatation is reviweingan investment proposal. The initial cost as well as the
estimate of the book value of the investment at the end of each year, the net after tax cash flows for each year, and
the net income for each year are presented in the following schedule. the salvage value of the investment at the
end of each year is equal to its book value. There should be no salvage value at the end of the investment's life.

origin of data Balance Sheet - Cash Flow Income

Non-Current Statement - Net Statement -
Assets Operating Cash Net Profit
Flow after tax
Year Initial Cost Annual Net Annual Net
and Book After Tax Cash Income
Value flows
0 $ 1,050,000
1 $ 700,000 $ 500,000 $ 150,000
2 $ 420,000 $ 450,000 $ 170,000
3 $ 210,000 $ 400,000 $ 190,000
4 $ 70,000 $ 350,000 $ 210,000
5 $ - $ 300,000 $ 230,000

Managment uses a 16% after tax target rate of return for new investment proposals.

Assumption : Assume that the cash flows in years 1 to 5 occur uniformly throughout the year.
Scenario I:

How long does it takes to fully recover the initial investment, ignoring the present value factor?
Year Paybank
Period (year)
Initial Investment 0 $ 1,050,000
less: Annual Net After Tax Cash 1 $ 500,000 1
flows
$ 550,000
Annual Net After Tax Cash 2 $ 450,000 1
flows
$ 100,000
Annual Net After Tax Cash 3 $ 100,000 0.25
flows
Full Recovery $ -

Payback Period 2.25 years

Analytical Review:

Ignoring the Present Value factor, the company is expected to fully recover the initial invesment in 2.25 years based
on the projected net cash flow.
Scenario II:

What is the rate of return ignoring the time value for money. ARR?

Average Net $ 190,000

Income
Accounting rate of return = Initial = $ 1,050,000 = 18%
Investment

Year Annual Net Average Net

Income Income
1 $ 150,000
2 $ 170,000
3 $ 190,000
4 $ 210,000
5 $ 230,000
$ 950,000 $ 190,000

Analytical Review:

The Investment is expected to have accounting rate of return of 18%. The investment is considered worthy as the
ARR is above the expected rate of return, however, ARR ignored the time value factor, hence further analysis need to
be done, such as NPV analysis
Scenario III:

What is the Net Present Values of the initial investments.

Target rate of return 16% PV = 1/ (1+r)^n

Year After Tax Cash Discount NPV

Flow Factor @ RoR
= 16%

Initial Investment 0 $ (1,050,000) 1.000 $ (1,050,000)

Net Cash Inflow 1 $ 500,000 0.862 $ 431,034
2 $ 450,000 0.743 $ 334,423
3 $ 400,000 0.641 $ 256,263
4 $ 350,000 0.552 $ 193,302
5 $ 300,000 0.476 $ 142,834
Net Present Value $ 307,857

Analytical Review:

The investment is shown worthy as the NPV is a positive at $307,857, however this decision is based on the
assumption that net cash inflow is reliable.