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Insert 8- Page 1 of 1 Ch 8 Tool Kit 11/8/2001 Chapter 8. Tool Kit for Cash Flow Estimation and Risk Analysis Model for Evaluating A New Capital Budgeting Project: The first section of this worksheet contains a model for evaluating new projects. In Part 1, we first list the key inputs used in the calculations. Part 2 goes on to calculate depreciation schedules for the building and for the equipment. Part 3 then determines the after-tax salvage values (i.e., net cash flows) that will come from disposing of the building and the equipment at the end of the project's life. Part 4 calculates the estimated cash flows over each year of the project's life. Part 5 then uses the estimated cash flows to estimate the key outputs, the project's NPV, IRR, MIRR, and Payback. Finally, in Parts 6 and 7, we consider the riskiness of the project by showing how changes in the inputs result in changes in the key outputs. Note that all dollars are shown in thousands; this is done for convenience. Identifying the relevant cash flows For a new project, the incremental cash flows can be divided into the following categories: initial investment outlay, operating cash flows over the project's life, and terminal year cash flows. The data used in the model were taken from the example in Chapter 8. In addition to the input data, we have included an excerpt from the MACRS Depreciation Schedule for 39-year (building) and 5-year (equipment) depreciation, and a table outlining the determination of net salvage values to be incorporated into our cash flow estimation. Table 8-3. Analysis of a New (Expansion) Project Part 1. Input Data (in thousands of dollars) Key Output: NPV = $5,809 Building cost (= Depreciable basis) $12,000 Equipment cost (= Depreciable basis) $8,000 Market value of building in 2007 $7,500 Net Operating WC / Sales 10% Market value of equip. in 2007 $2,000 First year sales (in units) 20,000 Tax rate 40% Growth rate in units sold 0.0% WACC 12% Sales price per unit $3.00 Inflation: growth in sales price 2.0% Variable cost per unit $2.10 Inflation: growth in VC per unit 2.0% Fixed costs $8,000 Inflation: growth in fixed costs 1.0% Years Cumulative 1 2 3 4 Depr'n Building Depr'n Rate 1.3% 2.6% 2.6% 2.6% Building Depr'n $156 $312 $312 $312 $1,092 Ending Book Val: Cost - Cum. Depr'n 11,844 11,532 11,220 $10,908 Equipment Depr'n Rate 20.0% 32.0% 19.0% 12.0% Equipment Depr'n $1,600 $2,560 $1,520 $960 $6,640 Ending Book Val: Cost - Cum. Depr'n 6,400 3,840 2,320 $1,360 This worksheet contains the model used to analyze RIC's new project decision as described in the text. The TAB key labeled "Depreciation" provides details about depreciation. In addition, a model for analyzing replacement decisions is provided on a separate sheet that can be accessed by pressing the TAB key labeled "Replacement Analysis" at the bottom of the screen. Part 2. Depreciation Schedule A B C D E F G H I J K L M N O P Q R S T U 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54
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Insert 8- Page 1 of 1 Part 3 of Table 8-3. Net Salvage Values in 2007 Building Equipment Total Estimated Market Value in 2007 $7,500 $2,000 10,908 1,360 -3,408 640 Taxes paid or tax credit -1,363 256 $8,863 $1,744 $10,607 Part 4 of Table 8-3. Projected Net Cash Years 0 1 2 3 4 2003
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