# Net working capital 20000 24000 28000 32000

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net working capital (20,000) (24,000) (28,000) (32,000) - Additional working capital (20,000) (4,000) (4,000) (4,000) Gains on disposal of equipment Tax on capital gain Free Cash Flows (120,000) 30,500 26,600 25,580 Payback (120,000) (89,500) (62,900) (37,320) y = ax + b 66,000 (10,060) 5 4 a 76060 b = y - ax b -314300 We want to find x' such that y = 0 (i.e. ax' + b = 0) => x' = -b/a x' 4.132264 years x' 4 years 1.58716803 months x' 4 years 1 months y 5 y 4 x 5 x 4 a = (y 5 - y 4 ) / (x 5 - x 4 ) 0 1 2 3 4 5 (150,000) (100,000) (50,000) 0 50,000 100,000 Payback

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Project B Year 0 1 2 3 Free Cash Flows + Net result (27,500) 6,600 33,660 + Depreciation 80,000 48,000 28,800 - Fixed Capital Investment (200,000) 0 0 0 net working capital (20,000) (40,000) (60,000) (80,000) - Additional working capital (20,000) (20,000) (20,000) (20,000) Gains on disposal of equipment Tax on capital gain Free Cash Flows (220,000) 32,500 34,600 42,460 Payback (220,000) (187,500) (152,900) (110,440) y = ax + b 143,000 (54,720) 5 4 a 197720 b = y - ax b -845600 We want to find x' such that y = 0 (i.e. ax' + b = 0) => x' = -b/a x' 4.27675501 years x' 4 years 3.32106008 months x' 4 years 3 months y 5 y 4 x 5 x 4 a = (y 5 - y 4 ) / (x 5 - x 4 ) 0 1 2 3 4 5 (250,000) (200,000) (150,000) (100,000) (50,000) 0 50,000 100,000 150,000 200,000 Payback
Discount rate 10% Project A 4 5 Year 0 1 Free Cash Flows 20,460 23,760 + Net result (5,500) 10,800 10,800 + Depreciation 40,000 0 0 - Fixed Capital Investment (100,000) 0 (36,000) net working capital (20,000) (24,000) (4,000) 36,000 - Additional working capital (20,000) (4,000) 10,000 Gains on disposal of equipment (4,500) Tax on capital gain 27,260 76,060 Free Cash Flows (120,000) 30,500 Discounted Cash Flows (120,000) 27,727 (10,060) 66,000 Discounted Payback (120,000) (92,273) y = ax + b 14,776

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• Fall '08
• PERRY

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