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G H 1 K A B D 1 Original Cost of Equipment 2 Addional Investment Rquired in Working Capital 3 Sales Operating Expenses 4 0 E F $10,000,000.00 $1,000,000.00 Depreciation Operating Earnings Taxes After Tax Operating Cash Flow Net Salvage Value Cash Flows 5 6 1 2. 3 7 4 8 9 10 11 5 6 7 8 9 12 13 14 10 15 16 NPV 17 Sales in year 1 are expected to be $1,000,000 and expected to grow at 10% per year for the first 5 years and then slow to 5% growth per year for years 6-10 18 19 Years 1-5 20 Years 6-10 10.00% 5.00% C D Annual Dep.% A B B 21 22 Depreciation Schedule 23 24 25 26 0 27 1 28 2 2 29 3 30 4 31 5 32 6 33 7 34 8 35 9 36 10 37 38 VOUWNO 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% 100.00% A B D E F G H 39 40 Operating Expenses are Expected to be 60% of Sales 41 42 Company's Tax Rate is Expected to be 30% 43 44 Expected Yield to Maturity on company's 10 year bonds if issued today is : 2.00% 45 46 Risk Free Rate is 0.12% 47 Company's Beta is 1.4 48 Market/Equity Risk Premium 6.00% 49 50 Target Capital Structure used to raise initial capital outlay 51 52 40% Debt 53 60% Common Stock 54 55 Cost of Debt 1.40% 56 Cost of Common Stock 8.52% 57 WACC 5.67% 58 59 60 At the end of year 10, the company believes they will be able to sell the equipment for $500,000. At that time the equipment will have been fully depreciated 61 62 There were 3 types of cash flows that needed to be taken into account. Initial Investment in year 0 included Cost of Equipment ($10,000,000) + Addition to working capital ($1,000,000) Each years (Years 1-10) After tax operating cash flow-This equals the sales- operating expenses - depreciation (which was calculated annually using the $10,000,000 cost of equipment and the annual rate provided in the schedule). This gives you Operating Earnings - Taxes which are figured from the operating earnings (Negative taxes were treated as a refund or added back + Depreciation Salvage Value -only applied in year 10. This is the amount expected to receive upon sale of equipment ($500,000) less the taxes on the gain of $150,000 which gave you a net salvage value of $350,000 in year 10 Taxes on Gain = Tax Rate x Gain on sale Gain on sale = Sales Proceeds-book value of equipment or the amount of the 10,000,000 which had not yet been depreciated. Gain was $500,000-0 or $500,000 G H 1 K A B D 1 Original Cost of Equipment 2 Addional Investment Rquired in Working Capital 3 Sales Operating Expenses 4 0 E F $10,000,000.00 $1,000,000.00 Depreciation Operating Earnings Taxes After Tax Operating Cash Flow Net Salvage Value Cash Flows 5 6 1 2. 3 7 4 8 9 10 11 5 6 7 8 9 12 13 14 10 15 16 NPV 17 Sales in year 1 are expected to be $1,000,000 and expected to grow at 10% per year for the first 5 years and then slow to 5% growth per year for years 6-10 18 19 Years 1-5 20 Years 6-10 10.00% 5.00% C D Annual Dep.% A B B 21 22 Depreciation Schedule 23 24 25 26 0 27 1 28 2 2 29 3 30 4 31 5 32 6 33 7 34 8 35 9 36 10 37 38 VOUWNO 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% 100.00% A B D E F G H 39 40 Operating Expenses are Expected to be 60% of Sales 41 42 Company's Tax Rate is Expected to be 30% 43 44 Expected Yield to Maturity on company's 10 year bonds if issued today is : 2.00% 45 46 Risk Free Rate is 0.12% 47 Company's Beta is 1.4 48 Market/Equity Risk Premium 6.00% 49 50 Target Capital Structure used to raise initial capital outlay 51 52 40% Debt 53 60% Common Stock 54 55 Cost of Debt 1.40% 56 Cost of Common Stock 8.52% 57 WACC 5.67% 58 59 60 At the end of year 10, the company believes they will be able to sell the equipment for $500,000. At that time the equipment will have been fully depreciated 61 62 There were 3 types of cash flows that needed to be taken into account. Initial Investment in year 0 included Cost of Equipment ($10,000,000) + Addition to working capital ($1,000,000) Each years (Years 1-10) After tax operating cash flow-This equals the sales- operating expenses - depreciation (which was calculated annually using the $10,000,000 cost of equipment and the annual rate provided in the schedule). This gives you Operating Earnings - Taxes which are figured from the operating earnings (Negative taxes were treated as a refund or added back + Depreciation Salvage Value -only applied in year 10. This is the amount expected to receive upon sale of equipment ($500,000) less the taxes on the gain of $150,000 which gave you a net salvage value of $350,000 in year 10 Taxes on Gain = Tax Rate x Gain on sale Gain on sale = Sales Proceeds-book value of equipment or the amount of the 10,000,000 which had not yet been depreciated. Gain was $500,000-0 or $500,000

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