ch 12 (risk)

# ch 12 (risk) - Table 12-1 Cash Flow Estimation and Analysis...

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Table 12-1 Cash Flow Estimation and Analysis for Expansion Project S 0 1 2 3 4 Investment Outlays at Time = 0 Equipment -\$900 Net WC -100 Unit sales 537 520 505 490 Sales price \$10.00 \$10.00 \$10.00 \$10.00 Variable cost per unit \$5.092 \$5.391 \$5.228 \$6.106 \$5,370 \$5,200 \$5,050 \$4,900 Variable costs = Units × Cost/unit 2,735 2,803 2,640 2,992 Fixed operating costs except depr'n 2,000 2,000 2,000 2,000 297 405 135 63 Total operating costs \$5,032 \$5,208 \$4,775 \$5,055 EBIT (or Operating income) \$338 -\$8 \$275 -\$155 Taxes on operating income 40% 135 -3 110 -62 After-tax project operating income \$203 -\$5 \$165 -\$93 Add back depreciation 297 405 135 63 Salvage value (taxed as ordinary income) 50 Tax on salvage value (SV is taxed at 40%) -20 Recovery of net working capital 100 Project net cash flows (Time Line) -\$1,000 \$500 \$400 \$300 \$100 Accelerated 1 2 3 4 Cost: \$900 Rate 33% 45% 15% 7% Depreciation \$297 \$405 \$135 \$63 Straight line Cost: \$900 Rate 25% 25% 25% 25% Depreciation \$225 \$225 \$225 \$225 10% Accelerated Formulas Straight line NPV \$78.82 =NPV(D29,F22:I22)+E22 \$64.44 IRR 14.489% =IRR(E22:I22) 13.437% MIRR 12.106% =MIRR(E22:I22,D29,D29) 11.731% Payback 2.33 =G2+(-E22-F22-G22)/H22 2.60 Net Cash Flows Over the Project's Life Sales revenues = Units × Price Depreciation: Accelerated from table below Depreciation Alternative d epreciation Project Evaluation @ WACC = 1. Accelerated depreciation rates are set by Congress. We show the approximate rates for a 4-year asset in 2008. Companies also have the option of using straight-line depreciation. Under IRS rules, salvage value is not deducted when establishing the depreciable basis. However, if a salvage payment is received, it is called a recapture of depreciation and is taxed at the 40% rate. 2. If the firm owned assets that would be used for the project but would be sold if the project is not accepted, the after-tax value of those assets would be shown as an "opportunity cost" in the "Investment Outlays" section. 3. If this project would reduce sales and cash flows from one of the firm's other divisions, then the after-tax cannibalization effect, or "externality," would be deducted from the net cash flows shown on Row 22.

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4. If the firm had previously incurred costs associated with this project, but those costs could not be recovered regardless of whether this project is accepted, then they are "sunk costs" and should not enter the analysis.
Table 12-2. Replacement Project R 0 1 2 3 4 Part I. Net Cash Flows Before Replacement: Old Machine Sales revenues \$2,500 \$2,500 \$2,500 \$2,500 Costs except depreciation 1,000 1,000 1,000 1,000 Depreciation 100 100 100 100 Total operating costs \$1,100 \$1,100 \$1,100 \$1,100 Operating income \$1,400 \$1,400 \$1,400 \$1,400 Taxes 40% 560 560 560 560 After-tax operating income \$840 \$840 \$840 \$840 Add back depreciation 100 100 100 100 Net cash flows before replacement \$940 \$940 \$940 \$940 Part II. Net Cash Flows After Replacement with the New Machine New machine cost: -\$2,000 After-tax salvage value, old machine

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## This note was uploaded on 10/13/2010 for the course USMLE na taught by Professor Na during the Spring '10 term at St. Matthew's University.

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ch 12 (risk) - Table 12-1 Cash Flow Estimation and Analysis...

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