20k at time zero and 15 of sales the after Year NWC Change NWC Change capital

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

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(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 6
CF 2.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

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