Professional Documents
Culture Documents
The Super Project: Cash Flow Estimation For Capital Budgeting
The Super Project: Cash Flow Estimation For Capital Budgeting
4- 2
Investment Criteria
Project ranking according to
Payback period
Accounting rate of return
4- 3
R&D
Product
Design
Market
Testing
Manufacturing
Investment
Working
Capital
4- 4
Risk of investment?
4- 5
4- 6
4- 7
Include:
agglomerator and building use (opportunity cost)
overhead costs (side effect)
4- 8
Year
1
Net sales
$2,112
COGS
$1,100
Gross profit
1,012
Advertising expense 1,100
Increased overhead
Depreciation
46
Start-up costs
15
2
$2,304
$1,200
1,104
1,050
3
$2,496
$1,300
1,196
1,000
4
$2,688
$1,400
1,288
900
43
41
($149)
(77)
$11
6
Net Profit
Depreciation
(72)
65
Cash flow
(7)
38
5
$2,880
$1,500
1,380
700
90
35
6
$2,880
$1,500
1,380
700
90
33
7
$3,072
$1,600
1,472
730
90
30
8
$3,072
$1,600
1,472
730
90
26
9
$3,264
$1,700
1,564
750
90
24
10
$3,264
$1,700
1,564
750
90
21
$155
81
$350
182
$555
289
$557
290
$622
323
$626
326
$700
364
$703
366
5
61
74
58
168
54
266
50
267
46
299
42
300
37
336
34
337
30
$66
$132
$222
$316
$313
$341
$337
$370
$367
Depreciation for Jell-O facilities: Sum-of-year digits; 40/15 year lives; $133/320
4- 9
Year New P&E Jell-O Facilities Working Capital CF Operations Total Cash Flows
0
($200)
($453)
$8
($645)
1
($329)
(7)
(336)
2
55
66
121
3
3
132
135
4
7
222
229
5
23
316
339
6
(1)
313
312
7
(13)
341
328
8
0
337
337
9
(12)
370
358
10
0
367
367
11
31
60
267
358
Investment tax credit of $8 in year 0; Tax shield on write-off of equip. in yr 11
4- 10
DCF Calculation
Year Cash Flow Discount
0
0
1/(1.1)
=1
$645
1
0.909
$336
2
$121
0.826
3
$135
0.751
4
$229
0.683
5
$339
0.621
6
$312
0.564
7
$328
0.513
8
$337
0.467
9
$358
0.424
10
$367
0.386
11
$358
0.350
PV
$645
$305
100
101
156
211
176
168
157
152
142
125
4- 11
NPV
1500
IRR = 18.5%
1000
500
0
-500
10
15
Discount rate
20
25
Sensitivity Analysis
Use of Jell-O Facilities
4- 12
Ye a r
0
1
2
3
4
5
6
7
8
9
10
11
Tota l
De pre ciation Ta x
PV of
Ex pe nse
Shelte r
Ca sh Flow
Foregone
Fore gone at 10%
$453
$46
$24
(22)
43
22
(18)
41
21
(16)
38
20
(13)
35
18
(11)
33
17
(10)
30
16
(8)
26
14
(6)
24
12
(5)
21
11
(4)
60
(21)
$317
Sensitivity Analysis
Overhead
4- 13
Ove rhe a d
Sa vings
Yea r
0
1
2
3
4
5
6
7
8
9
10
11
Tota l
Afte r
Ta x
CF
$90
90
90
90
90
90
PV of
Ca sh Flow
at 10%
$43
43
43
43
43
43
0
0
0
0
$27
24
22
20
18
17
$129
Sensitivity Analysis
Erosion
4- 14
Contribution
Loss from
Erosion
Year
0
1
2
3
4
5
6
7
8
9
10
11
Total
$180
200
210
220
230
230
240
240
250
250
PV of
After tax
Cash Flow
Cash Flow at 10%
($86)
($96)
($101)
($106)
($110)
($110)
($115)
($115)
($120)
($120)
(79)
(79)
(76)
(72)
(69)
(62)
(59)
(54)
(51)
(46)
($647)
4- 15
OVERHEAD
yes
yes
EROSION
(109)
yes
(109)
no
no
yes
208
no
yes
538
no
538
yes
20
208
337
538
538
no
yes
no
(109)
855
no
667
855
984