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FM12 Ch 12 Tool Kit - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15...

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5/12/2008 Chapter 12. Tool Kit for Cash Flow Estimation and Risk Analysis Note that all dollars are shown in thousands; this is done for convenience. Table 12-1. Analysis of a New (Expansion) Project (Dollars in thousands) Part 1. Input Data Key Output: NPV = $5,809 Building cost (= Depreciable basis) $12,000 Equipment cost (= Depreciable basis) $8,000 Market value of building at salvage $7,500 Net Operating WC / Sales 10% Market value of equip. at salvage $2,000 First year sales (in units) 20,000 Tax rate 40% Growth rate in units sold 0.0% WACC 12.0% 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 1 2 3 4 Cumulative 2009 2010 2011 2012 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 Part 3. Net Salvage Values at End of Project Building Equipment Total Market value when salvaged $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. Projected Net Cash Flows Years 0 1 2 3 4 2008 2009 2010 2011 2012 Investment Outlays: Long-Term Assets Building ($12,000) Equipment (8,000) Operating Cash Flows over the Project's Life Units sold 20,000 20,000 20,000 20,000 Sales price $3.00 $3.06 $3.12 $3.18 Sales revenue $60,000 $61,200 $62,424 $63,672 Variable costs 42,000 42,840 43,697 44,571 Fixed operating costs 8,000 8,080 8,161 8,242 Depreciation (building) 156 312 312 312 Depreciation (equipment) 1,600 2,560 1,520 960 Oper. income before taxes (EBIT) 8,244 7,408 8,734 9,587 Taxes on operating income (40%) 3,298 2,963 3,494 3,835 Net operating profit after taxes (NOPAT) 4,946 4,445 5,241 5,752 Add back depreciation 1,756 2,872 1,832 1,272 Operating cash flow $6,702 $7,317 $7,073 $7,024 Cash Flows Due to Net Operating Working Capital Net operating working capital (based on sales) $6,000 $6,120 $6,242 $6,367 $0 Cash flow due to investment in NOWC ($6,000) ($120) ($122) ($125) $6,367 Salvage Cash Flows: Long-Term Assets Net salvage cash flow: Building $8,863 Net salvage cash flow: Equipment 1,744 Total salvage cash flows $10,607 Net cash flow (Time line of cash flows) ($26,000) $6,582 $7,194 $6,948 $23,999 Part 5. Key Output and Appraisal of the Proposed Project (WACC = 12%) Net Present Value $5,809 IRR 20.12% MIRR 17.79% PI 1.22 Years 0 1 2 3 4 Cumulative cash flow for payback (19,418) (12,223) (5,275) 18,723 Part of year required for payback: 1.00 1.00 1.00 0.22 Payback = 3.22 Years 0 1 2 3 4 Discounted cash flow for payback: 5,877 5,735 4,945 15,252 Cumulative discounted cash flow (20,123) (14,388) (9,442) 5,809 Part of year required for payback: 1.00 1.00 1.00 0.62 Payback = 3.62 Sensitivity Analysis Here we use an Excel "Data Table" to find NPV different unit sales, holding other thing constant. % Deviation WACC % Deviation 1st YEAR UNIT SALES from NPV from Units NPV Base Case WACC 5,809 Base Case Sold $5,809 -30% 8.4% $9,030 -30% 14,000 -$3,628 -15% 10.2% $7,362 -15% 17,000 $1,091 0% 12.0% $5,809 Base Case 0% 20,000 $5,809 15% 13.8% $4,363 15% 23,000 $10,528 30% 15.6% $3,014 30% 26,000 $15,247 % Deviation VARIABLE COSTS % Deviation GROWTH RATE, UNITS from Variable NPV from Growth NPV Base Case Cost $5,809 Base Case Rate % $5,809 -30% $1.47 $29,404 -30% -30% -$4,923 -15% $1.79 $17,607 -15% -15% -$115 0% $2.10 $5,809 Base Case 0% 0% $5,809 15% $2.42 -$5,988 15% 15% $12,987 30% $2.73 -$17,785 30% 30% $21,556 % Deviation SALES PRICE % Deviation FIXED COSTS from Sales NPV from Fixed NPV Base Case Price $5,809 Base Case Costs $5,809 -30% $2.10 -$27,223 -30% $5,600 $10,243 -15% $2.55 -$10,707 -15% $6,800 $8,026 0% $3.00 $5,809 Base Case 0% $8,000 $5,809 15% $3.45 $22,326 15% $9,200 $3,593 30% $3.90 $38,842 30% $10,400 $1,376 We summarize the data tables, arranged by sensitivity, and graphed the most sensitive items in the following chart:
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