12 Chapter model - 12 Chapter model 7:08 Chapter 12 Cash...

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Page 1 12 Chapter model 3/22/2010 7:08 2/16/2006 Chapter 12. Cash Flow Estimation and Risk Analysis In Chapter 13, we extend the analysis done here to deal with real options and other topics. All dollars are shown in thousands. Data are taken from the example in Chapter 12. This worksheet contains a model to analyze BQC's new computer control project. Models for analyzing real options, replacement decisions, projects with unequal lives, and bond refunding are also provided on separate worksheets. Access those models by pressing the appropriate TAB key at the bottom of the screen. PROJECT ANALYSIS (Section 12.2) The main model, on this tab, evaluates the computer project. Part 1 lists the key inputs used in the calculations. Part 2 develops the depreciation data. Part 3 estimates the cash flows from disposing of the building and the equipment at the end of the project's life. Part 4 calculates the cash flows during each year of the project's operating life. Part 5 then uses the estimated cash flows to estimate the key outputs and shows them as a time line which is used to calculate the 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 would result in changes in the key outputs. The model also does a scenario analysis where three variables--unit sales, the sale price, and the VC%--are changed. Other variables are held constant at their base case levels. The analysis can be done manually by inserting data for the various scenarios into the input data cells. However, we also set up Scenarios using the Scenario Manager tool, which is described in the Tutorial. This tool can be used to move to the different scenarios, but it is not necessary.
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Page 2 Table 12-1. Analysis of a New (Expansion) Project (Thousands of Dollars) Part 1. Input Data Building cost (= Depr'n basis) $12,000 Equipment cost (= Depr'n basis) $8,000 Market value of building in 2010 $7,500 Net Operating WC $6,000 Market value of equip. in 2010 $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 0.0% Variable cost per unit $2.10 Inflation: growth in VC per unit 0.0% Fixed costs $8,000 Inflation: growth in fixed costs 0.0% Years 2007 2008 2009 2010 Building Depr'n Rate 1.3% 2.6% 2.6% 2.6% Building Depr'n Expense $156 $312 $312 $312 Cumulative Depr'n $156 $468 $780 $1,092 Ending Book Value: 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 Expense $1,600 $2,560 $1,520 $960 Cumulative Depr'n $1,600 $4,160 $5,680 $6,640 Ending Book Value: Cost - Cum. Depr'n $6,400 $3,840 $2,320 $1,360 the equipment) to determine the depreciation expense for the year. Part 3. Salvage Value Calculations Building Equipment Total Estimated Market Value in 2010 $7,500 $2,000 10,908 1,360 -3,408 640 Tax liability or credit -1,363 256 $8,863 $1,744 $10,607 For the building, accumulated depreciation is $1,092, so book value is $12,000 - $1,092 = $10,908. For the equipment, accumulated depreciation is $6,640, so book value is $8,000 - $6,640 = $1,360.
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