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Capital Cost
Machine cost $$$$,$$$
Shipping charges $$$,$$$
Installation $$$,$$$
Total Capital Cost $$$$,$$$
Salvage Value at end of 4 Yrs $$$,$$$

Depreciation - MACRS 3-Yrs


Year 1 2 3
Rate $$.$$% $$.$$% $$.$$%
Annual depreciation $$$,$$$ $$$$,$$$ $$$,$$$

Income Model
Units sold annually $,$$$
Revenue per unit - Yr 1 $$$$
Cost per unit - Yr 1 $$$$
Annual inflation $%
Net working capital (% of sales) $$%

Tax Rate $$%


WACC $$%
Net Working Capital
Year 0 1 2
Revenue $$$$,$$$ $$$$,$$$
Net Working Capital $$$,$$$ $$$,$$$ $$$,$$$
CF due to NWC or Incremental
NWC ($$$,$$$) ($$,$$$) ($$,$$$)

After-tax salvage value


Year 4
Net Book Value $$
Salvage Value $$$,$$$
Capital Gain $$$,$$$
Tax on Capital Gain ($$$,$$$)
Post-tax salvage value $$$,$$$

Operating Model
Year 0 1 2
Revenue $$$$,$$$ $$$$,$$$
Less: Operating Cost ($$$$,$$$) ($$$$,$$$)
EBITDA $$$$,$$$ $$$$,$$$
Less: Depreciation ($$$,$$$) ($$$$,$$$)
Operating Profit $$$,$$$ $$,$$$
Less: Tax ($$$,$$$) ($$,$$$)
Operating Profit after tax $$$,$$$ $$,$$$
Add: Depreciation $$$,$$$ $$$$,$$$
Cash flow from operations $$$$,$$$ $$$$,$$$
Less: Initial investment ($$$$,$$$)
Less: Incremental NWC ($$$,$$$) ($$,$$$) ($$,$$$)
Add: After-tax salvage value
Add: Recovery of NWC
Project's Net Free Cash Flow ($$$$,$$$) $$$$,$$$ $$$$,$$$
Discounted Free Cash Flow ($$$$,$$$) $$$$,$$$ $$$$,$$$

NPV at 12% $46,939 Remarks


IRR $$.$% Since the NPV is positive and MIRR is more than WACC, the
project is profitable and hence should be considered.
Remarks
Since the NPV is positive and MIRR is more than WACC, the
project is profitable and hence should be considered.
MIRR $$.$%
Profitability Index (PI) $.$
Payback period (Years) $.$
Discounted Payback (Years) $.$

Sensitivity Analysis

Unit Sales NPV MIRR


1350 $$$,$$$ $$.$%
1485
1620
1755
1215
1080
945

NPV MIRR

Of the three variables tested above, NPV and MIRR of the project is most sensitive to change in unit sales, moderately sen
Hence, cautionary measures should be taken if there is any stress observed in units sold and effective measures should be
steeper than the plots for other two variables and hence units sales is the most critical or sen

Scenario Analysis
Scenarios Probability NPV
Worst $$% ($$$$,$$$)
Base $$% $$$,$$$
Best $$% $$$$,$$$

Expected NPV $$$,$$$


Standard Deviation $$$$,$$$
Coefficient of Variation $.$$

Since the coefficient of variation at 2.19 is much above the range of average
project COV, the new project possess very high risk.

Given, risky nature of the project, the risk adjusted WACC would be
17%. Now the NPV at 17% WACC is $8,421 and MIRR is 17.7%. Since
NPV is positive and MIRR is still higher than WACC, the project should
be accepted.
Given, risky nature of the project, the risk adjusted WACC would be
17%. Now the NPV at 17% WACC is $8,421 and MIRR is 17.7%. Since
NPV is positive and MIRR is still higher than WACC, the project should
be accepted.
agement, Strategy,
PSIM, Online Test

4
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marks
MIRR is more than WACC, the
ence should be considered.
Salvage Value NPV MIRR WACC NPV MIRR
$25,000 $$$,$$$ $$.$% 12.0% $$$,$$$ $$.$%
$27,500 13.2%
$30,000 14.4%
$32,500 15.6%
$22,500 10.8%
$20,000 9.6%
$17,500 8.4%

NPV MIRR
NPV MIRR

o change in unit sales, moderately sensitive to change in WACC and is least affected by change in salvage value.
sold and effective measures should be initiated to restore the lost or declining sales. The plot of unit sales is much
e units sales is the most critical or sensitive variable in overall project consideration.
Capital Cost
Machine cost $$$$,$$$
Shipping charges $$$,$$$
Installation $$$,$$$
Total Capital Cost $$$$,$$$
Salvage Value at end of 4 Yrs $$$,$$$

Depreciation - MACRS 3-Yrs


Year 1 2 3
Rate $$.$$% $$.$$% $$.$$%
Annual depreciation $$$,$$$ $$$$,$$$ $$$,$$$

Income Model
Units sold annually $,$$$
Revenue per unit - Yr 1 $$$$
Cost per unit - Yr 1 $$$$
Annual inflation $%
Net working capital (% of sales) $$%

Tax Rate $$%


WACC $$%

Net Working Capital


Year 0 1 2
Revenue $$$$,$$$ $$$$,$$$
Net Working Capital $$$,$$$ $$$,$$$ $$$,$$$
CF due to NWC or Incremental
NWC ($$$,$$$) ($$$$) ($$$$)

After-tax salvage value


Year $
Net Book Value $$
Salvage Value $$$,$$$
Capital Gain $$$,$$$
Tax on Capital Gain ($$$,$$$)
Post-tax salvage value $$$,$$$

Operating Model
Year 0 1 2
Revenue $$$$,$$$ $$$$,$$$
Less: Operating Cost ($$$$,$$$) ($$$$,$$$)
EBITDA $$$,$$$ $$$,$$$
Less: Depreciation ($$$,$$$) ($$$$,$$$)
Operating Profit ($$$,$$$) ($$$,$$$)
Less: Tax $$$,$$$ $$$,$$$
Operating Profit after tax ($$$,$$$) ($$$,$$$)
Add: Depreciation $$$,$$$ $$$$,$$$
Cash flow from operations $$$,$$$ $$$,$$$
Less: Initial investment ($$$$,$$$)
Less: Incremental NWC ($$$,$$$) ($$$$) ($$$$)
Add: After-tax salvage value
Add: Recovery of NWC
Project's Net Free Cash Flow ($$$$,$$$) $$$,$$$ $$$,$$$
Discounted Free Cash Flow ($$$$,$$$) $$$,$$$ $$$,$$$

NPV at 12% ($$$$,$$$)


IRR -$.$%
MIRR $.$%
Profitability Index (PI) $.$
Payback period (Years) ($.$)
Discounted Payback (Years) $.$

Sensitivity Analysis

Unit Sales NPV MIRR


1000 ($$$$,$$$) $.$%
1100
1200
1300
900
800
700

NPV MIRR
4
$.$$%
$$$,$$$

3 4
$$$$,$$$ $$$$,$$$
$$$,$$$ $

($$$$) $$$,$$$

3 4
$$$$,$$$ $$$$,$$$
($$$$,$$$) ($$$$,$$$)
$$$,$$$ $$$,$$$
($$$,$$$) ($$$,$$$)
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($$,$$$) ($$$,$$$)
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$$$,$$$ $$$,$$$
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($$$$)
$$$,$$$
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$$$,$$$ $$$,$$$

Salvage Value NPV MIRR WACC NPV MIRR


$25,000 ($$$$,$$$) $.$% 12.0% ($$$$,$$$) $.$%
$27,500 13.2%
$30,000 14.4%
$32,500 15.6%
$22,500 10.8%
$20,000 9.6%
$17,500 8.4%

NPV MIRR
N PV MIRR
Capital Cost
Machine cost $$$$,$$$
Shipping charges $$$,$$$
Installation $$$,$$$
Total Capital Cost $$$$,$$$
Salvage Value at end of 4 Yrs $$$,$$$

Depreciation - MACRS 3-Yrs


Year 1 2 3
Rate $$.$$% $$.$$% $$.$$%
Annual depreciation $$$,$$$ $$$$,$$$ $$$,$$$

Income Model
Units sold annually $,$$$
Revenue per unit - Yr 1 $$$$
Cost per unit - Yr 1 $$$$
Annual inflation $%
Net working capital (% of sales) $$%

Tax Rate $$%


WACC $$%

Net Working Capital


Year 0 1 2
Revenue $$$$,$$$ $$$$,$$$
Net Working Capital $$$,$$$ $$$,$$$ $$$,$$$
CF due to NWC or Incremental
NWC ($$$,$$$) ($$,$$$) ($$,$$$)

After-tax salvage value


Year 4
Net Book Value $$
Salvage Value $$$,$$$
Capital Gain $$$,$$$
Tax on Capital Gain ($$$,$$$)
Post-tax salvage value $$$,$$$

Operating Model
Year 0 1 2
Revenue $$$$,$$$ $$$$,$$$
Less: Operating Cost ($$$$,$$$) ($$$$,$$$)
EBITDA $$$$,$$$ $$$$,$$$
Less: Depreciation ($$$,$$$) ($$$$,$$$)
Operating Profit $$$$,$$$ $$$$,$$$
Less: Tax ($$$,$$$) ($$$,$$$)
Operating Profit after tax $$$,$$$ $$$,$$$
Add: Depreciation $$$,$$$ $$$$,$$$
Cash flow from operations $$$$,$$$ $$$$,$$$
Less: Initial investment ($$$$,$$$)
Less: Incremental NWC ($$$,$$$) ($$,$$$) ($$,$$$)
Add: After-tax salvage value
Add: Recovery of NWC
Project's Net Free Cash Flow ($$$$,$$$) $$$$,$$$ $$$$,$$$
Discounted Free Cash Flow ($$$$,$$$) $$$$,$$$ $$$$,$$$

NPV at 12% $$$$,$$$


IRR $$.$%
MIRR $$.$%
Profitability Index (PI) $.$
Payback period (Years) $.$
Discounted Payback (Years) $.$

Sensitivity Analysis

Unit Sales NPV MIRR


2000 $$$$,$$$ $$.$%
2200
2400
2600
1800
1600
1400

NPV MIRR
4
$.$$%
$$$,$$$

3 4
$$$$,$$$ $$$$,$$$
$$$,$$$ $

($$,$$$) $$$,$$$

3 4
$$$$,$$$ $$$$,$$$
($$$$,$$$) ($$$$,$$$)
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($$$,$$$) ($$$,$$$)
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$$$$,$$$ $$$$,$$$
$$$,$$$ $$$,$$$
$$$$,$$$ $$$$,$$$

($$,$$$)
$$$,$$$
$$$,$$$
$$$$,$$$ $$$$,$$$
$$$$,$$$ $$$$,$$$

Salvage Value NPV MIRR WACC NPV MIRR


$25,000 $$$$,$$$ $$.$% 12.0% $$$$,$$$ $$.$%
$27,500 13.2%
$30,000 14.4%
$32,500 15.6%
$22,500 10.8%
$20,000 9.6%
$17,500 8.4%

NPV MIRR
N PV MIR R