Question

The table below illustrates a very simple capital budgeting project over just three years. It represents many of the key items in the capital budgeting process. The WACC is 12.5% and the tax rate used for analysis and planning is 33.0%. Run through the calculations necessary to find the numbers for the missing spaces.

NOTE: If the table is not fully viewable, zoom out until it is.

Round all numbers to the nearest whole dollar and enter in the spaces without decimals or dollar signs; negative numbers should be entered with a simple minus sign (and no space). No credit is given for incorrect entries.

For example, calculated cash of $2,347.59 would be entered as 2348; a calculation of $(3,290) should be entered as -3290.

?

	Period 0	Period 1	Period 2	Period 3
Depreciation		$400	$400	$400
Other operating expenses		$650	$850	$1,150
Operating income		$(250)	$700	$900
NOPAT		$	$469	$603
Adjustment for depreciation		$	$400	$400
Anticipated changes in cash flow from existing products
Salvage or terminal value				$250
Initial project capital investments	$(1,200)
Net incremental cash flows	$(1,200)	$	$869	$1,253
WACC	12.5%
PV	$(1,200)	$	$	$880
NPV	$573

Answer 1

NOPAT = operating profit * (1 - tax rate)

For period 1, NOPAT = - $ 250 * ( 1 - 0.33) = - $250 * 0.67 = - $168

Adjustment for depriciation is the amount depriciated for a particular period. for period 1, Adjustment for depriciation will be $ 400.

Net Incremental cash flow = NOPAT + Adjustment for depriciation = - $168 + $400 = $ 232

PV = Net Incremental cash flow / ( 1 + WACC) ^ no of periods

For period 1, PV = $232 / (1 + 0.125) = $232 / 1.125 = $206

For period 2, PV = $869 / (1 + 0.125) ^ 2 = $869 / 1.266 = $687

So above given table will like :