ECN 5600_Chapter04 - A 1 2 Discount rate 3 Year 4 0 5 1 6 2...

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TWO PROJECTS Discount rate 12% Year Project A Project B 0 -1000 -800 1 500 420 2 500 420 3 500 420 4 500 420 5 500 420 NPV 802.39 714.01 #NAME? A B C D 1 2 3 4 5 6 7 8 9 10 11 12
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TWO PROJECTS Discount rate 12% Year Project A Project B 0 -1000 -800 1 500 420 2 500 420 3 500 420 4 500 420 5 500 420 IRR 41.04% 44.03% #NAME? A B C D 1 2 3 4 5 6 7 8 9 10 11 12
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SIMPLE CAPITAL BUDGETING EXAMPLE Discount rate 15% Year Cash flow 0 -1,000 1 100 2 200 3 300 4 400 5 500 6 600 PV of future cash flows 1,172.13 #NAME? NPV 172.13 #NAME? IRR 19.71% #NAME? NPV 0% 1,100.00 #NAME? 3% 849.34 #NAME? 6% 637.67 9% 457.83 12% 304.16 15% 172.13 18% 58.10 21% -40.86 24% -127.14 27% -202.71 30% -269.16 Discount rate -2% 0% 3% 5% 8% 10% 13% 15% 18% 20% 23% 25% 28% 30% -400 -200 0 200 400 600 800 1,000 1,200 NPV of Cash Flows Discount rate NPV A B C D E F G 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
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RANKING PROJECTS WITH NPV AND IRR Discount rate 15% Year Project A Project B 0 -500 -500 1 100 250 2 100 250 3 150 200 4 200 100 5 400 50 NPV 74.42 119.96 #NAME? IRR 19.77% 27.38% #NAME? TABLE OF NPVs AND DISCOUNT RATES 0% 450.00 350.00 #NAME? 2% 382.57 311.53 #NAME? 4% 321.69 275.90 6% 266.60 242.84 8% 216.64 212.11 10% 171.22 183.49 12% 129.85 156.79 14% 92.08 131.84 16% 57.53 108.47 18% 25.86 86.57 20% -3.22 66.00 22% -29.96 46.66 24% -54.61 28.45 26% -77.36 11.28 28% -98.39 -4.93 30% -117.87 -20.25 Calculating the crossover point Year Project A Project B 0 -500 -500 0 #NAME? 1 100 250 -150 #NAME? 2 100 250 -150 3 150 200 -50 4 200 100 100 5 400 50 350 IRR 8.51% #NAME? Project A NPV Project B NPV Differential cash flows: cash flow(A) - cash flow(B) -5% 0% 5% 10% 15% 20% 25% 30% -200 -100 0 100 200 300 400 500 Project A NPV Project B NPV A B C D E F G H 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
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IGNORE SUNK COSTS House cost 100,000 Fix up cost 20,000 Year 0 -120,000 -20,000 1 90,000 90,000 IRR -25% 350% #NAME? Cash flow wrong! Cash flow right! A B C D 1 2 3 4 5 6 7 8
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Cost of condo 100,000 30% Annual reportable income calculation Rent 24,000 Expenses Property taxes -1,500 Miscellaneous expenses -1,000 Depreciation -10,000 Reportable income 11,500 #NAME? Taxes (rate = 30%) -3,450 #NAME? Net income 8,050 #NAME? Net income 8,050 #NAME? Add back depreciation 10,000 #NAME? Cash flow 18,050 #NAME? Rent 24,000 Expenses Property taxes -1,500 Miscellaneous expenses -1,000 Depreciation 0 Reportable income 21,500 #NAME? Taxes (rate = 30%) -6,450 #NAME? Net income without depreciaiton 15,050 #NAME? Depreciation tax shield 3,000 #NAME? Cash flow 18,050 #NAME? Cash flow, method 1: Add back depreciation Cash flow, method 2: Compute after-tax income without depreciation, then add depreciation tax shield This is what the net income would have been if depreciation were not an expense for tax purposes.
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ECN 5600_Chapter04 - A 1 2 Discount rate 3 Year 4 0 5 1 6 2...

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