The $7 million acquisition cost of the land six years ago is a sunk cost.
The $9.8 million current aftertax value of the land is an opportunity cost.
The $21 million cash outlay and $850,000 grading expenses are the initial fixed asset investments
needed to get the project going.
Cash flow = $9,800,000 + 21,000,000 + 850,000 = $31,650,000
2.
3.
Sales
$ 825,000
Variable costs
453,750
Fixed costs
187,150
Depreciation
91,000
EBIT
$ 93,100
Taxes@35%
32,585
Net income
$ 60,515
4.
Sales
$ 643,800
Variable costs
345,300
Depreciation
96,000
EBIT
$ 202,500
Taxes@35%
70,875
Net income
$ 131,625
OCF = EBIT + Depreciation Taxes = $202,500 + 96,000 70,875 = $227,625
Depreciation tax shield = Depreciation(T) = .35($96,000) = $33,600
5.
Beginning Beginning
Depreciation
Ending
Year
Book Value Depreciation Allowance Book Value
1
$960,000.00
14.29% $137,184.00 $822,816.00
2
822,816.00
24.49% 235,104.00
587,712.00
3
587,712.00
17.49% 167,904.00
419,808.00
4
419,808.00
12.49% 119,904.00
299,904.00
5
299,904.00
8.93%
85,728.00
214,176.00
6
214,176.00
8.92%
85,632.00
128,544.00
7
128,544.00
8.93%
85,728.00
42,816.00
8
42,816.00
4.46%
42,816.00
0
6.
7.
8.
Sales of new
Lost sales of old
Variable costs
Fixed costs
Depreciation
EBT
Tax
Net income
$35,700,000
3,852,000
17,516,400
1,250,000
1,350,000
$11,731,600
4,458,008
$ 7,273,592
Year
0
1
2
3
Cash Flow
$2,250,000
901,500
901,500
1,165,250
= $2,100,000 150,000
= $901,500 + 150,000 + 175,000 + (0 175,000)(.35)
Cash Flow
$2,250,000
901,475.50
983,207.50
1,083,567.00
= $2,100,000 150,000
= ($1,010,000)(.65) + 0.35($699,930)
= ($1,010,000)(.65) + 0.35($933,450)
= ($1,010,000)(.65) + 0.35($311,010) + $168,214 + 150,000
Note: NWC cost in Year 0, and the recovery of the NWC at the end of the project.
NPV = $2,250,000 + ($901,475.50/1.14) + ($983,207.50/1.142) + ($1,083,567 /1.143)
NPV = $28,691.09
13. Annual depreciation = $625,000/5 = $125,000
Aftertax salvage value = MV + (BV MV)T = MV + (0 MV)*T
Aftertax salvage value = MV*(1 T)
Aftertax salvage value = $95,000(1 0.34) = $62,700
OCF = $183,000(1 0.34) + 0.34($125,000) = $163,280
NPV = $625,000 41,000 + $163,280(PVIFA8%,5) + [($62,700 + 41,000) / 1.085]
NPV = $56,506.17
14. Annual depreciation charge = $520,000/5 = $104,000
Aftertax salvage value = $40,000(1 0.35) = $26,000
OCF = $160,000(1 0.35) + 0.35($104,000) = $140,400
NPV = 0 = $520,000 + 35,000 + $140,400(PVIFAIRR%,5) + [($26,000 35,000) / (1+IRR)5]
IRR = 13.33%
20.
Scenario
Base case
Best case
Worst case
Unit Sales
70,000
80,500
59,500
Unit Price
$1,070
$1,231
$910
Fixed Costs
$4,800,000
$4,080,000
$5,520,000
$575,000
115,000
179,000
155,000
$126,000
50,400
$ 75,600
OCF = $230,600
Payback period = $620,000 / $230,600 = 2.69 years
NPV = $620,000 + $230,600(PVIFA13%,4) = $65,913.09
0 = $620,000 + $230,600(PVIFAIRR%,4)
IRR = 18.03%