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1) Life Period of the Equipment = 4 years 2) New equipment cost 3) Equipment ship & install cost 4) Related start up cost 5) Equip. Salvage Value 6) Sales for first year (1) $ ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) Year Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) Total Initial Outlay $ sssss Operations: Revenue Operating Cost Depreciation EBIT Taxes Net Income Add back Depreciation $ $ $ CFO 0 7) Sales increase per year (200,000) 8) Operating cost: (35,000) (60 Percent of Sales) (5,000) 9) Depreciation (Straight Line)/YR 15,000 10) Corporate Marginal Tax Rate 200,000 11) Cost of Capital (WACC) CF1 1 CF2 2 (240.000) (240,000) $ Total Operating Cash Flow Terminal: 1) Salvage value (after tax) Total Salvage Value Before Tax (1-T) Project Net Cash Flows $ NPV = ($162.997) Q#1 Would you accept the project based on NPV, IRR? $ $ $ $ $ $ S $ (240,000) $ IRR = -42.5% 200,000 $ (120,000) $ (60,000) 20,000 (4,200) 15,800 60,000 75,800 75,800 $ -60% $ Payback= CF3 3 210,000 $ 220,500 $ (126,000) $ (132,300) $ $ $ $ . $ $ 2 5% (120,000) (60,000) 21% 10% CF4 4 231,525 (138,915) 11.850 11,850 11,850 Net Income Add back Depreciation 15,800 60,000 75,800 Salvage Value Before Tax (1-T) $ 75,800 $ NPV= ($162.997) IRR= 42.5% Q#1 Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off is 3 years? Q#2 How would you explain to your CEO what NPV means? Q#3 What are advantages and disadvantages of using only Payback method? 55 Q4 What are advantages and disadvantages of using NPV versus IRR? Q85 ST Explain the difference between independent projects and mutually exclusive projects. When you are confronted with Mutually Exclusive Projects and have coflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why? Total Operating Cash Flow Terminal: 31) Salvage value (after tax) Total Project Net Cash Flows 31 $ (240,000) $ $ $ $ . $ Payback 2 11.850 11,850 11,850 1) Life Period of the Equipment = 4 years 2) New equipment cost 3) Equipment ship & install cost 4) Related start up cost 5) Equip. Salvage Value 6) Sales for first year (1) $ ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) Year Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) Total Initial Outlay $ sssss Operations: Revenue Operating Cost Depreciation EBIT Taxes Net Income Add back Depreciation $ $ $ CFO 0 7) Sales increase per year (200,000) 8) Operating cost: (35,000) (60 Percent of Sales) (5,000) 9) Depreciation (Straight Line)/YR 15,000 10) Corporate Marginal Tax Rate 200,000 11) Cost of Capital (WACC) CF1 1 CF2 2 (240.000) (240,000) $ Total Operating Cash Flow Terminal: 1) Salvage value (after tax) Total Salvage Value Before Tax (1-T) Project Net Cash Flows $ NPV = ($162.997) Q#1 Would you accept the project based on NPV, IRR? $ $ $ $ $ $ S $ (240,000) $ IRR = -42.5% 200,000 $ (120,000) $ (60,000) 20,000 (4,200) 15,800 60,000 75,800 75,800 $ -60% $ Payback= CF3 3 210,000 $ 220,500 $ (126,000) $ (132,300) $ $ $ $ . $ $ 2 5% (120,000) (60,000) 21% 10% CF4 4 231,525 (138,915) 11.850 11,850 11,850 Net Income Add back Depreciation 15,800 60,000 75,800 Salvage Value Before Tax (1-T) $ 75,800 $ NPV= ($162.997) IRR= 42.5% Q#1 Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off is 3 years? Q#2 How would you explain to your CEO what NPV means? Q#3 What are advantages and disadvantages of using only Payback method? 55 Q4 What are advantages and disadvantages of using NPV versus IRR? Q85 ST Explain the difference between independent projects and mutually exclusive projects. When you are confronted with Mutually Exclusive Projects and have coflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why? Total Operating Cash Flow Terminal: 31) Salvage value (after tax) Total Project Net Cash Flows 31 $ (240,000) $ $ $ $ . $ Payback 2 11.850 11,850 11,850

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