50%(4)2 out of 4 people found this document helpful
This preview shows page 6 - 9 out of 10 pages.
(20k at time zero and 15% of sales the after)YearNWCChange NWCChange capital Spending 0. 20K20k800k1. 54K34k2. 90K36k3. 108K18k4. 107.25K-.75k5. 99K-8.25k6. 82.5K-16.5k7. 66K-16.5k8. 49.5k-16.5k -49.5release of working capital6
CF2.Cost decreases.Cost Reduction Example:$100,000 machine with 12-year depreciable life, use straight line. The discount rate is 11%. Themachine will reduce cost by $11,000/year and increases current expenditures by $1000/yr. The tax rate is 25%. Also there is one other machine that has depreciation of $20,000/yr, no salvage value.DEP= 100,000/12=8,333.33OCF= (Rev.-Cost)(1-T) + DEP(T)= (11,000-1000)(1-.25)+ 8,333.33(.25) = 7500+2083.33= 9583.33CF0 -$100k, CF1-12: $9583.33 Required return= 11%, NPV= -$37,781.61, IRR= 2.219 or 2.22%, so REJECT.Let’s change this problem:Assume that you have the same cash flows described above, but now unexpectedly the project ends you must sell the machine in the 6thyear for $70,000. How does this change the problem and what is the salvage value?7