In: Economics
PROJECT A | ||||||||||||
A | Initial Cost | $10,000,000 | ||||||||||
Present Value (PV) of Cash Flow: | ||||||||||||
(Cash Flow)/((1+i)^N) | ||||||||||||
i=Discount Rate=Required return=8%=0.08 | ||||||||||||
N=Year of Cash Flow | ||||||||||||
CALCULATION OF CASH FLOWS AND PV OF CASH FLOWS: | ||||||||||||
N | Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | |||
B | Annual Sales | $20,000,000 | $20,000,000 | $20,000,000 | $20,000,000 | $20,000,000 | $20,000,000 | $20,000,000 | $20,000,000 | |||
C=0.6*B | $12,000,000 | $12,000,000 | $12,000,000 | $12,000,000 | $12,000,000 | $12,000,000 | $12,000,000 | $12,000,000 | ||||
D=0.05*C | Reduction in cost of sales | $600,000 | $600,000 | $600,000 | $600,000 | $600,000 | $600,000 | $600,000 | $600,000 | |||
E=(1-0.25)*D | After tax Savings | $450,000 | $450,000 | $450,000 | $450,000 | $450,000 | $450,000 | $450,000 | $450,000 | |||
Depreciation Tax Shield | ||||||||||||
F | MACRS -7 year depreciation rate | 14.29% | 24.49% | 17.49% | 12.49% | 8.93% | 8.92% | 8.93% | 4.46% | |||
G=F*10000000 | Annual depreciation | $ 1,429,000 | $ 2,449,000 | $ 1,749,000 | $ 1,249,000 | $ 893,000 | $ 892,000 | $ 893,000 | $ 446,000 | |||
H=G*0.25 | Depreciation Tax Shield | $ 357,250 | $ 612,250 | $ 437,250 | $ 312,250 | $ 223,250 | $ 223,000 | $ 223,250 | $ 111,500 | |||
I | Before tax cash flow from salvage | $500,000 | ||||||||||
J=I*(1-0.25) | After tax cash flow fromsalvage | $375,000 | ||||||||||
K=E+H+J | Total Cash Inflow | $807,250 | $1,062,250 | $887,250 | $762,250 | $673,250 | $673,000 | $673,250 | $936,500 | SUM | ||
L=K/(1.08^N) | Present value(PV) of Total cash inflow | $ 747,454 | $ 910,708 | $ 704,328 | $ 560,277 | $ 458,203 | $ 424,104 | $ 392,835 | $ 505,962 | $ 4,703,870 | ||
M | Sum of PV of Cash inflows | $ 4,703,870 | ||||||||||
NPV=M-A | Net Present Value | $ (5,296,130) | ||||||||||
PROJECT B | ||||||||||||
Initial Cost: | ||||||||||||
Start up cost | $7,000,000 | |||||||||||
After tax cost =$7millionj*(1-0.3) | $4,900,000 | |||||||||||
Net Working Capital | $1,000,000 | |||||||||||
A | Total InitialCapital | $5,900,000 | ||||||||||
Present Value (PV) of Cash Flow: | ||||||||||||
(Cash Flow)/((1+i)^N) | ||||||||||||
i=Discount Rate=Required return=12%=0.12 | ||||||||||||
N=Year of Cash Flow | ||||||||||||
CALCULATION OF CASH FLOWS AND PV OF CASH FLOWS: | ||||||||||||
Sales in year 0 | $20,000,000 | |||||||||||
Sales in year 1 | $22,000,000 | (20000000*1.1) | ||||||||||
Increase in sales in year 1 | $2,000,000 | |||||||||||
Sales in year (N+1)=1.1*(Sales in Year (N)) | ||||||||||||
Cost of sales in Year 0 | $12,000,000 | (0.6*20000000) | ||||||||||
Cost of sales in year 1 | $13,200,000 | (1.1*12000000) | ||||||||||
N | Year | 1 | 2 | 3 | 4 | 5 | ||||||
B | Sales | $22,000,000 | $24,200,000 | $26,620,000 | $29,282,000 | $32,210,200 | ||||||
C=B-$20million | Increase in Sales | $2,000,000 | $4,200,000 | $6,620,000 | $9,282,000 | $12,210,200 | ||||||
D | Cost of sale | $13,200,000 | $14,520,000 | $15,972,000 | $17,569,200 | $19,326,120 | ||||||
E=D-$12million | Increase in cost of sales | $1,200,000 | $2,520,000 | $3,972,000 | $5,569,200 | $7,326,120 | ||||||
F=C-E | Increase in pretax cash inflow | $800,000 | $1,680,000 | $2,648,000 | $3,712,800 | $4,884,080 | ||||||
G=F*(1-0.3) | Increase in after tax cash in flow | $560,000 | $1,176,000 | $1,853,600 | $2,598,960 | $3,418,856 | ||||||
H | TerminalCash inflow | $1,000,000 | ||||||||||
I=G+H | Total Cash Inflow | $560,000 | $1,176,000 | $1,853,600 | $2,598,960 | $4,418,856 | Sum | |||||
PV=I/(1.12^N) | Present Value (PV)of total cash inflow | $ 500,000 | $ 937,500 | $ 1,319,356 | $ 1,651,686 | $ 2,507,378 | $ 6,915,919 | |||||
J | Sum of PV of totalcash inflow | $ 6,915,919 | ||||||||||
NPV=J-A | Net Present Value | $ 1,015,919 | ||||||||||
PROJECT C | ||||||||||||
Present Value (PV) of Cash Flow: | ||||||||||||
(Cash Flow)/((1+i)^N) | ||||||||||||
i=Discount Rate=Required return=10%=0.10 | ||||||||||||
N=Year of Cash Flow | ||||||||||||
Sales in year 1=1.15*$20million | $ 23,000,000 | |||||||||||
Cost in year 1=1.15*$12 million | $ 13,800,000 | |||||||||||
N | Year | 1 | 2 | 3 | 4 | 5 | 6 | |||||
A | Cash flow for marketing/advertising | ($2,000,000) | ($2,000,000) | ($2,000,000) | ($2,000,000) | ($2,000,000) | ($2,000,000) | |||||
B | Sales | $ 23,000,000 | $ 26,450,000 | $ 30,417,500 | $ 34,980,125 | $ 40,227,144 | $ 46,261,215 | |||||
C=B-$20million | Increase in Sales | $ 3,000,000 | $ 6,450,000 | $ 10,417,500 | $ 14,980,125 | $ 20,227,144 | $ 26,261,215 | |||||
D | Cost of sale | $ 13,800,000 | $ 15,870,000 | $ 18,250,500 | $ 20,988,075 | $ 24,136,286 | $ 27,756,729 | |||||
E=D-$12million | Increase in cost of sales | $ 1,800,000 | $ 3,870,000 | $ 6,250,500 | $ 8,988,075 | $ 12,136,286 | $ 15,756,729 | |||||
F=C-E | Increase in pretax cash inflow | $ 1,200,000 | $ 2,580,000 | $ 4,167,000 | $ 5,992,050 | $ 8,090,857 | $ 10,504,486 | |||||
G=F*(1-0.25) | Increase in after tax cash inflow | $ 900,000 | $ 1,935,000 | $ 3,125,250 | $ 4,494,038 | $ 6,068,143 | $ 7,878,365 | |||||
H=A+G | Net Cash Flow | $ (1,100,000) | $ (65,000) | $ 1,125,250 | $ 2,494,038 | $ 4,068,143 | $ 5,878,365 | SUM | ||||
PV=I/(1.10^N) | Present Value (PV) of Net Cash Flow: | $ (1,000,000) | $ (53,719) | $ 845,417 | $ 1,703,461 | $ 2,525,997 | $ 3,318,184 | $ 7,339,340 | ||||
NPV=J-A | Sum of PV of Cash Flow | $ 7,339,340 | ||||||||||
NPV | ||||||||||||
PROJECT A | $ (5,296,130) | |||||||||||
PROJECT B | $ 1,015,919 | |||||||||||
PROJECT C | $ 7,339,340 | |||||||||||
Project C brings most value to the company | ||||||||||||