Question

Period	0	1	2	3	4
EBIT		$35,000	$45,000	$60,000	$75,000

Illustrates earnings before interest and taxes for a capital investment project

• Initial cost of the investment: $250,000

• Change in net working capital: $10,000 (50% of this is recoverable at the end of the project)

• Tax rate: 31%

• WACC: 15%

• Depreciation: straight line over five years

• Projected cash flow from salvage: $136,250

What is the Operating Cash Flow for Year 3?

What is the NPV?

Answer 1

	0	1	2	3	4
EBIT [presumed to be after depreciation of $50,000 per year]		$         35,000	$         45,000	$       60,000	$       75,000
-Tax at 31%		$         10,850	$         13,950	$       18,600	$       23,250
=NOPAT		$         24,150	$         31,050	$       41,400	$       51,750
+Depreciation [250000/5]		$         50,000	$         50,000	$       50,000	$       50,000
=OCF		$         74,150	$         81,050	$       91,400	$ 1,01,750
-Capital expenditure	$       2,50,000
-Change in NWC	$          10,000				$       -5,000
+Cash flow from salvage					$   1,36,250
=Annual after tax cash flow	$      -2,60,000	$         74,150	$         81,050	$       91,400	$   2,43,000
PVIF at 15% [PVIF = 1/1.15^t]	1	0.86957	0.75614	0.65752	0.57175
PV at 15%	$      -2,60,000	$         64,478	$         61,285	$       60,097	$   1,38,936
NPV	$           64,797