Assignment #1 Scenario Analysis Chapter 7, Problem 26

Assignment #1 Scenario Analysis Chapter 7, Problem 26 -...

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OCF = Operating Cash Flow I believe the formula for OCF is:  OCF= ((P-VC)*Q-FC) (1-t) + t (D)) (You provided OCF= (P-V) (Q-FC) (1-t) + t (D)) The formula reads:  amount making per unit (P-VC) times the number of units (Q) less the fixed costs.  Tax is then accounted for.  Note the t(D) calculation is simply adding the tax benefit of depreciation P = price = $200 per ton  VC = Variable Costs = $180 per ton  Q = Quantity = 50,000  FC = Fixed Costs = $450,000  t = Tax rate = 39% D = Depreciation = (Paid – Salvage)/ Years = (1,750,000 – 513,000) / 8 years = $154,625    OCF = ((200-180)*50,000-450,000) (1-.39) + .39*(154,625)) = 395,803.75 (per year) An NPV formula for this project is:  NPV = Total investment (-) + PV of OCF + PV of investment change Total investment = -1,750,000-450,000 = -2,200,000 PV of OCF = (395,803.75 / .12) * (1-(1/(1.12^8))) = 1,966,210.45
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This note was uploaded on 02/05/2011 for the course FIN 335 taught by Professor Bill during the Spring '10 term at Union.

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