Next we compute the annual cash from years 1 5 cash

This preview shows page 24 - 25 out of 25 pages.

Next we compute the annual cash from years 1 5 Cash Next we compute the annual cash from years 1-5. Cash Flows for years 1-4 will be the same. S TEP 3: S OLVE Analysis of Annual Cash Inflows Years 1-4 Year 5 Increase in operating income $20,000 $20,000 Reduced salaries $100,000 $100,000 Reduced defects $50,000 $50,000 Reduced fringe benefits $10,000 $10,000 Total cash inflows $180,000 $180,000 S TEP 3: S OLVE Analysis of Annual Cash Out Flows Years 1-4 Years 5 Increased maintenance -$40,000 -$40,000 Increased depreciation -$50,000 -$50,000 Net operating income $90,000 $90,000 Less: Taxes -$27,000 -$27,000 Net operating profit after taxes $63,000 $63,000 Plus: depreciation $50,000 $50,000 Operating cash flow $113,000 $113,000 Less: Change in operating working capital $20,000 Less: CAPEX 50,0000 Free Cash Flows $113,000 $183,000
Image of page 24

Subscribe to view the full document.

25 S TEP 4: A NALYZE In this case, we observe that the new machine generated cost savings and also increased the revenues by $20,000. Based on the estimates of initial cash outflow and subsequent annual free cash flows for years 1-5, we can compute the NPV. C OMPUTING NPV Continue Checkpoint 12.2: Check Yourself example . Compute the NPV for this replacement project based on discount rate of 15%. C OMPUTING NPV NPV can be easily computed using mathematical equation (11-1): NPV = -$285,000 + $113,000/(1.15) 1 + $113,000/(1.15) 2 + $113 000/(1 15) 3 + $113 000/(1 15) 4 + $183 000/(1 15) 5 + $113,000/(1.15) + $113,000/(1.15) + $183,000/(1.15) = $128,595.90
Image of page 25

{[ snackBarMessage ]}

Get FREE access by uploading your study materials

Upload your study materials now and get free access to over 25 million documents.

Upload now for FREE access Or pay now for instant access
Christopher Reinemann
"Before using Course Hero my grade was at 78%. By the end of the semester my grade was at 90%. I could not have done it without all the class material I found."
— Christopher R., University of Rhode Island '15, Course Hero Intern

Ask a question for free

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern