20k at time zero and 15 of sales the after year nwc

(20k at time zero and 15% of sales the after)
Year NWC Change NWC Change capital Spending
0. 20K 20k 800k
1. 54K 34k
2. 90K 36k
3. 108K 18k
4. 107.25K -.75k
5. 99K -8.25k
6. 82.5K -16.5k
7. 66K -16.5k
8. 49.5k -16.5k -49.5
release of working capital
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CF
2. Cost decreases.
Cost Reduction Example :
$100,000 machine with 12-year depreciable life, use straight line. The discount rate is 11%. The
machine 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=8,333.33
OCF= (Rev.-Cost)(1-T) + DEP(T)
= (11,000-1000)(1-.25)+ 8,333.33(.25)
= 7500+2083.33= 9583.33
CF0 -$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 6 th year for $70,000. How does this change the problem
and what is the salvage value?
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