Tax
Taxes
40% (T) = Tax rate
5.9%
7%
60%
1 O
O O
O O
O
3
O
O O
O
C
C C
C C
C
CF
CF CF
CF
FF FF FF
Beginning Cash Flow - initial investment, opportunity cost, set-up cost, net working capital (NWC)
1 *Do not include sunk costs.
Operating Cash Flow - revenues, costs, taxes, depreciation (subject to CCA taxes). *Do not
2 include interest, it is part of the WACC. There is two parts to part 2 - operating cash flow (OCF)
and and tax shield adjustment.
If (D) depreciation expense is at a constant rate (i.e. straight line), just use this to calculate the
OCF.
A 1 1 (1 r ) N
( R C )(1 T )
r
TWIST ALERT - if the expected amount of income generated aka cash revenues is growing, use
this formula to calculate the income as a GROWING annuity.
1 g N
1
( R C )( 1 T ) * 1 rN
r g
If (D) depreciation expense is not a constant rate, add this for each asset to calculate the OCF.
Ending Cash Flow - is the PV of Salvage Value (machines, equipment, etc), NWC, and sale of
3 land.
( S NWC Land )
(1 r ) N
( S NWC Land )
(1 r ) N
:) :) :)
NPV = 1 2 3 $358,233
WACC = r
2 $702,396
Machine
40% (T) = Corporate Tax Rate
B $125,403
5.89% (r) = WACC