Patterns of Cash Flows and NPV Analysis

Patterns of Cash Flows
RRR
0.15
Year
A
0
1
2
3
4
==>> Bigger CF early, slope less steep

Less Time for cash flows to shrink (take interest out)
==>> Smaller CF early, slope more steep
Cash flows more weight toward end, NPV smaller
More time for larger cash flows to shrink
Total
Also: Larger Discount Rate, NPV Smaller
RRR
B
(15,000)
8,000
6,000
5,000
1,000
NPV A
0
0.05
0.1
0.15
0.2
(15,000)
1,000
5,000
6,000
8,000
NPV B
$6,000.00
NPV
$4,000.00
$2,000.00
$0.00
($2,000.00)
($4,000.00)
RRR
RRR
NPV A
NPV B
0 $5,000.00 $5,000.00
0.05 $3,203.11 $2,252.17
0.1 $1,670.99
$13.32
0.15
$352.72 ($1,830.59)
0.2 ($790.90) ($3,364.20)
Patterns of Cash Flows

RRR
0.15
Year
A
0
1
2
3
4
==>> Bigger CF early, slope less steep

Less Time for cash flows to shrink (take interest out)
==>> Smaller CF early, slope more steep
Cash flows more weight toward end, NPV smaller
More time for larger cash flows to shrink
Total
Also: Larger Discount Rate, NPV Smaller
RRR
0
0.05
0.1
0.15
0.2
B
(15,000)
8,000
6,000
5,000
1,000
5,000
(15,000)
1,000
5,000
6,000
8,000
5,000
NPV A
NPV B
$5,000.00
$5,000.00
$3,203.11
$2,252.17
$1,670.99
$13.32
$352.72 ($1,830.59)
($790.90) ($3,364.20)
$6,000.00
NPV
$4,000.00
$2,000.00
$0.00
($2,000.00)
($4,000.00)
RRR
RRR
NPV A
NPV B
NPV
$10,000.00
$5,000.00
$0.00
0
($5,000.00)
0.05
0.1
0.15
RRR
0.2
0.25
NPV A
NPV B
0 $5,000.00 $5,000.00
0.05 $3,203.11 $2,252.17
0.1 $1,670.99
$13.32
0.15
$352.72 ($1,830.59)
0.2 ($790.90) ($3,364.20)
XNPV & XIRR
Days
Years
Months
Periods
0
1
2
3
4
6
7
8
9
10
12
Date
11/12/2010
11/12/2011
11/12/2012
11/12/2013
11/12/2014
11/12/2016
11/12/2017
11/12/2018
11/12/2019
11/12/2020
11/12/2022
Cash Flow
$ (10,000.00)
$ 3,000.00
$ 3,000.00
$ 3,000.00
$ 3,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
Date
Cash Flow
11/12/2010
-5000
12/12/2010
700
1/12/2011
700
2/12/2011
700
3/12/2011
700
3/12/2012
700
3/12/2013
700
3/13/2013
700
3/14/2013
700
3/15/2013
700
Cash Flow
for PV
Cash Flow using

XNPV algorithm RRR
NPV using XNPV

0.2
* PV function method will be a few dollars/pe

XIRR
Cash Flow
XNPV
NPV w Formula
XIRR
RRR
0.15
NPV using XNPV NPV using PV

algorithm
function
unction method will be a few dollars/pennies off, sometimes even a few $100 off.
XNPV & XIRR
Days
Years
Months
Periods
0
1
2
3
4
6
7
8
9
10
12
Date
11/12/2010
11/12/2011
11/12/2012
11/12/2013
11/12/2014
11/12/2016
11/12/2017
11/12/2018
11/12/2019
11/12/2020
11/12/2022
Cash Flow
$ (10,000.00)
$ 3,000.00
$ 3,000.00
$ 3,000.00
$ 3,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
Date
Cash Flow
11/12/2010
-5000
12/12/2010
700
1/12/2011
700
2/12/2011
700
3/12/2011
700
3/12/2012
700
3/12/2013
700
3/13/2013
700
3/14/2013
700
3/15/2013
700
Cash Flow for Cash Flow using

PV
XNPV algorithm RRR
NPV using XNPV
($10,000.00)
($10,000.00)
0.2 $
4,326.41
$2,500.00
$2,500.00
$2,083.33
$2,082.29
* PV function method will be a few dollars/p
$1,736.11
$1,735.24
XIRR
$1,446.76
$1,446.04
0.299519902
$1,674.49
$1,672.82
$1,395.41
$1,394.01
$1,162.84
$1,161.68
$969.03
$968.07
$807.53
$806.32
$560.78
$559.94
Cash Flow
XNPV
RRR
-5000
321.4996083
0.15
692.0049108 NPV w Formula
683.8392393
321.4996083
675.7699229
668.5633813 XIRR
581.1368966
0.216428262
505.3364318
505.1429708
504.9495838
504.7562709
NPV using XNPV NPV using PV

algorithm
function
$4,326.41
$4,336.29
unction method will be a few dollars/pennies off, sometimes even a few $100 off.
PV uses these
periods:
0
1
2
3
4
6
7
8
9
10
12
XNPV uses these

periods:
0
1
2.002739726
3.002739726
4.002739726
6.005479452
7.005479452
8.005479452
9.005479452
10.00821918
12.00821918
Relevant Costs
Land (Bought 6 years ago)
Land MV today
Build Manufacturing Plant on Land
Grading Before Land can be used
Cash Flow Out For Year 0 Asset (not
including NWC)
$ 5,500,000.00
$ 6,000,000.00
$ 19,000,000.00
$
500,000.00
Sunk Cost
Not Relevant
Opportunity Cost
Relevant
Cost Today - Cash Out
Relevant Costs
Land MV today
Build Manufacturing Plant on Land
$ 5,500,000.00 Sunk Cost

$ 6,000,000.00 Opportunity Cost
$ 19,000,000.00 Cost Today - Cash Out
$
500,000.00 Cost Today - Cash Out
Cash Flow Out For Year 0 Asset (not

including NWC)
$ 25,500,000.00
Not Relevant
Relevant
Relevant
Relevant
Sunk Cost
Not Relevant
Opportunity Cost
Relevant
Erosion 1st Example

Market Study Cost
Product
D9 Bulldozer
D9-Q Billdozer
New Bulldozer
$90,000.00
Estimates Units Sold

26,000
5,000
21,000
Change in CF
D9 Bulldozer
D9-Q Billdozer
New Bulldozer
Total Relevant Sales Cash Flows
Erosion 2nd Example

Old Product
Price Old Printing Machine
Old Printing Machine Current Yearly Units Sold =
If New Unit Sold, Old Printing Machine Yearly Units Sold =
New Product
Price New Printing Machine
Expected Units Sold for New Printing Machine
VC as % of Sales
Depr on New Printing Machine Equipment
FC for New Printing Machine Equipment
Tax Rate
Goal:
Erosion In Sales From Old Printing Machine
Erosion In VC From Old Printing Machine
Sales From New Printing Machine
Total VC for New Printing Machine
Total FC for New Printing Machine
Depr for New Printing Machine
EBIT
Tax
OCF
Old Printing Machine

$
21,400.00
1,900
1,720
New Printing Machine
$
25,500.00
1,400
55%
$
1,500,000.00
$
1,000,000.00
0.34
What is annual OCF?
Price
$ 100,000.00
$ 125,000.00
$ 75,000.00
Change If New
Line Introduced Sales
3,000
(700)
Erosion 1st Example

Market Study Cost
$90,000.00 Sunk Cost
Product
D9 Bulldozer
D9-Q Billdozer
New Bulldozer
Estimates Units Sold

26,000
5,000
21,000
D9 Bulldozer
D9-Q Billdozer
New Bulldozer
Total Relevant Sales Cash Flows
Change in CF
$
300,000,000.00
$
(87,500,000.00)
$ 1,575,000,000.00
$ 1,787,500,000.00
Erosion 2nd Example

Old Product
Price Old Printing Machine
Old Printing Machine Current Yearly Units Sold =
If New Unit Sold, Old Printing Machine Yearly Units Sold =
New Product
Price New Printing Machine
Expected Units Sold for New Printing Machine
VC as % of Sales
Depr on New Printing Machine Equipment
FC for New Printing Machine Equipment
Tax Rate
Goal:
Erosion In Sales From Old Printing Machine
Erosion In VC From Old Printing Machine
Sales From New Printing Machine
Total VC for New Printing Machine
Total FC for New Printing Machine
Depr for New Printing Machine
EBIT
Tax
OCF
Old Printing Machine

$
21,400.00
1,900
1,720
New Printing Machine
$
25,500.00
1,400
55%
$
1,500,000.00
$
1,000,000.00
0.34
What is annual OCF?
$
$
$
$
$
$
$
$
$
(3,852,000.00)
2,118,600.00
35,700,000.00
(19,635,000.00)
(1,000,000.00)
(1,500,000.00)
11,831,600.00
4,022,744.00
9,308,856.00
Price
$ 100,000.00
$ 125,000.00
$ 75,000.00
Change If New
Line Introduced Sales
3,000 $ 2,600,000,000.00
(700) $
625,000,000.00
$ 1,575,000,000.00
Estimates of Future:
# of items sold
30,000
Price per item
$10.00
Variable Cost per item
$7.50
Life Of Project
3
RRR
0.175
Fixed Costs
$10,000.00 per year
Invest at time 0
$110,000.00
Depreciation method
SL
Salvage Value
$1,000.00
Removal Cost
$1,000.00
NWC investment at time 0
$10,000.00
Recover NWC at end
Tax Rate
0.34
Depreciation
Like Rent, Administrative Cost
Pro Forma Income Statement (Same For Each

Year)
Total Revenue
Total VC
Gross Profit
Total FC
Depreciation
EBIT
Taxes
NI not considering Interest
Annual Projected OCF = EBIT +
Depr - Taxes
If No interest OCF = NI + Depr
Tax Shield Approach = OCF =

(Sales - Costs)*(1-T) + Depr*T
Costs = VC + FC
Depr = Depreciation Expense
Year
Year 0
Year 1
Year 2
Year 3
OCF
Change in
NWC
T = Tax Rate
(Sales - Costs)*(1-T) = Cash Flow Without Dep

*sometimes is eaiser (analyzing Cost Cutting
Capital
Spending
Total Project Cash Flows

Cash Flows From Assets
NPV
IRR
Payback
T) = Cash Flow Without Depr Depr*T = Depreciation tax shield = "Non-cash expense saves on our tax bill".
iser (analyzing Cost Cutting projects)
Cumulative
Cash Flows
0
1
2
3
Estimates of Future:
# of items sold
30,000
Price per item
$10.00
Variable Cost per item
$7.50
Life Of Project
3
RRR
0.175
Fixed Costs
$10,000.00 per year
Invest at time 0
$110,000.00
Depreciation method
SL
Salvage Value
$1,000.00
Removal Cost
$1,000.00
NWC investment at time 0
$10,000.00
Recover NWC at end
Tax Rate
0.34
Depreciation
$36,666.67
Like Rent, Administrative Cost
Pro Forma Income Statement (Same For Each

Year)
Total Revenue
$300,000.00
Total VC
$225,000.00
Gross Profit
$75,000.00
Total FC
10,000.00
Depreciation
36,666.67
EBIT
$28,333.33
Taxes
9,633.00
NI not considering Interest
$18,700.33
Annual Projected OCF = EBIT +
Depr - Taxes
$55,367.00 If No interest OCF = NI + Depr
Tax Shield Approach = OCF =

(Sales - Costs)*(1-T) + Depr*T
$55,366.67
Costs = VC + FC
Depr = Depreciation Expense
Year
Year 0
Year 1
Year 2
Year 3
T = Tax Rate
(Sales - Costs)*(1-T) = Cash Flow Without Dep

*sometimes is eaiser (analyzing Cost Cutting
Change in
Capital
Total Project Cash Flows
NWC
Spending
Cash Flows From Assets
OCF
($10,000.00) ($110,000.00) $
(120,000.00)
$55,367.00
$
55,367.00
$55,367.00
$
55,367.00
$55,367.00
$10,000.00
$
65,367.00
NPV
IRR
Payback
7,518.13
21.25%
2.141753484
2.141753484
T) = Cash Flow Without Depr Depr*T = Depreciation tax shield = "Non-cash expense saves on our tax bill".
iser (analyzing Cost Cutting projects)
Cumulative
Cash Flows
$ (120,000.00)
$ (64,633.00)
$ (9,266.00)
$ 56,101.00
0
1
2
3
Reminder of How Transactions are Recorded with Accrual

Accounting
Record Sales Transaction in Journal
Account
DR
CR
AR
$100
Sales
$100
COGS
$50
Inv
$50
Expense
AP
Record Incur Expense Transaction in Journal

$25
Total Sales
Total Costs = VC + FC
Sales - (VC + FC)
a AR
$25
Example of How Accrual Accounting Must Be Un-done to get at Cash Flows
$1,000
$800
$200
Balance Sheet Beg. Balance Sheet
Balance
End. Balance
$200
$220
b Inventory
c AP
Net Working Capital
$100
$200
a AR
Sales
b Inventory
COGS Expenses
c AP
Expenses
Total Adjustment
OCF
Adjustment to OCF
Adjustment to OCF
$90
$180
170
ng Must Be Un-done to get at Cash Flows
AR went up by 20.00. This accrual accounting must be un-done.

Inventory went down by -10.00. This accrual accounting must be undone.
AP went down by -20.00. This accrual accounting must be un-done.
remove AR increase from Sales - sales were recorded on Income

Statement with no associated cash in.
add back Inventory decrease to COGS Expenses - expenses were recorded
on Income statement with no associated cash out.
remove AP decrease from Expenses - cash went out with no associated
expense in Income Statement.
Total Cash Flow = OCF - NWC - Cap Spending
Reminder of How Transactions are Recorded with Accrual

Accounting
Record Sales Transaction in Journal
Account
DR
CR
AR
$100
Sales
$100
COGS
$50
Inv
$50
Expense
AP
Record Incur Expense Transaction in Journal

$25
$25
Example of How Accrual Accounting Must Be Un-done to get at Cash Flows

Total Sales
$1,000
Total Costs = VC + FC
$800
Sales - (VC + FC)
$200
Balance Sheet Beg. Balance Sheet
Balance
End. Balance
a AR
$200
b Inventory
$100
c AP
Net Working Capital
$200
$100
a AR
Sales
b Inventory
COGS Expenses
c AP
Expenses
Total Adjustment
OCF
Adjustment to OCF
Adjustment to OCF
AR went up by 20.00. This accrual accounting

$220 must be un-done.
Inventory went down by -10.00. This accrual
$90 accounting must be un-done.
AP went down by -20.00. This accrual
$180 accounting must be un-done.
$130
remove AR increase from Sales - sales were
recorded on Income Statement with no
-$20 associated cash in.
add back Inventory decrease to COGS
Expenses - expenses were recorded on
Income statement with no associated cash
$10 out.
remove AP decrease from Expenses - cash
went out with no associated expense in
-$20 Income Statement.
-$30
170
$140 Total Cash Flow = OCF - NWC - Cap Spending
$140
Property
Research Equipment
Special Tools
Autos
Computers
Class
3-Year
5-Year
7-Year
Industrial Equipment
Office Furniture
Years
MACRS Property Class (abbreviated)

Example1
Example2
Research Equipment Special Tools
Autos
Computers
Industrial Equipment Office Furniture
Depreciation Allowances
Class
3-Year
5-Year
1
0.3333
2
0.4445
3
0.1481
4
0.0741
5
6
7
0.2
0.32
0.192
0.1152
0.1152
0.0576
8
Check:
7-Year
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
1
Marginal Tax Rate

Cost Of Asset
Property
Class
Year Beginning Book Value

1
$25,000.00
2
$20,000.00
3
$12,000.00
4
$7,200.00
5
$4,320.00
6
$1,440.00
7
8
0.34
$25,000
Computers
5-Year
Caculation:
25000*0.2
25000*0.32
25000*0.192
25000*0.1152
25000*0.1152
25000*0.0576
Non-cash Depreciation
Expense
$5,000.00
$8,000.00
$4,800.00
$2,880.00
$2,880.00
$1,440.00
$25,000.00
When selling at end, if MV > BV, then Pay Taxes On Difference between
MV and End MACRS BV - "we Depreciated it too much" - "recapture
depreciation" .
Sell Price = MV =
$4,500.00
Year Sold
4
End BV at year 4
$4,320.00
+ ==> already got tax
savings
- ==> paid too much tax
Pay this tax:
Total Cash Flow at End
$180.00 =J18-J20
$61.00 =ROUND(J21*$J$1,0)
$4,439.00 =J18-J22
When selling at end, if BV > MV, then get tax benefit - We have a loss from
sale.
Sell Price = MV =
$4,000.00
Year Sold
2
End BV at year 2
$12,000.00
savings
- ==> paid too much tax
Get this tax benefit:
-$8,000.00 =J27-J29
-$2,720.00 =ROUND(J30*$J$1,0)
$6,720.00 =J27-J31
End Book Value

$20,000.00
$12,000.00
$7,200.00
$4,320.00
$1,440.00
$0.00
Tax Rate in J1
Tax Rate in J1
Property
Research Equipment
Special Tools
Autos
Computers
Class
3-Year
5-Year
7-Year
Office Furniture
Years

Example1
Example2
Autos
Computers
Class
3-Year
5-Year
1
0.3333
2
0.4445
3
0.1481
4
0.0741
5
6
7
0.2
0.32
0.192
0.1152
0.1152
0.0576
8
Check:
7-Year
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
1
Marginal Tax Rate

Cost Of Asset
Property
Class

1
2
3
4
5
6
7
8
0.34
$25,000
Computers
Caculation:
Expense
depreciation" .
Sell Price = MV =
$4,500.00
Year Sold
4
End BV at year 4
savings
Pay this tax:
When selling at end, if BV > MV, then get tax benefit - We have a loss
from sale.
Sell Price = MV =
$4,000.00
Year Sold
2
End BV at year 2
Loss
Pay this tax:
End Book Value
Property
Research Equipment
Special Tools
Autos
Computers
Class
3-Year
5-Year
7-Year
Office Furniture
Years

Example1
Example2
Autos
Computers
Class
3-Year
5-Year
1
0.3333
2
0.4445
3
0.1481
4
0.0741
5
6
7
0.2
0.32
0.192
0.1152
0.1152
0.0576
8
Check:
7-Year
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
1
Marginal Tax Rate

Cost Of Asset
Property
Class

1
$25,000.00
2
$20,000.00
3
$12,000.00
4
$7,200.00
5
$4,320.00
6
$1,440.00
7
8
0.34
$25,000
Computers
5-Year
Caculation:
Expense
End Book Value
25000*0.2
$5,000.00
$20,000.00
25000*0.32
$8,000.00
$12,000.00
25000*0.192
$4,800.00
$7,200.00
25000*0.1152
$2,880.00
$4,320.00
25000*0.1152
$2,880.00
$1,440.00
25000*0.0576
$1,440.00
$0.00
$25,000.00
depreciation" .
Sell Price = MV =
$4,500.00
Year Sold
4
End BV at year 4
$4,320.00
savings
$180.00
Pay this tax:
$61.20
$4,438.80
When selling at end, if BV > MV, then get tax benefit - We have a loss
from sale.
Sell Price = MV =
$4,000.00
Year Sold
2
End BV at year 2
$12,000.00
Loss
-$8,000.00
Get this tax benefit:
$2,720.00
$6,720.00
Property Class
3-year property
5-year property
Personal Property (all property except real-estate)

Special handling devices for food and beverage manufacture.
Special tools for the manufacture of finished plastic products, fabricated
metal products, and motor vehicles
Property with ADR class life of 4 years or less
Information Systems; Computers / Peripherals
Aircraft and parts (of non-air-transport companies)
Computers
Petroleum drilling equipment
Property with ADR class life of more than 4 years and less than 10 years
7-year property
Certain geothermal, solar, and wind energy properties.

All other property not assigned to another class
Office furniture, fixtures, and equipment
Property with ADR class life of more than 10 years and less than 16 years
10-year property
Assets used in petroleum refining and certain food products

Vessels and water transportation equipment
Property with ADR class life of 16 years or more and less than 20 years
15-year property
Telephone distribution plants

Municipal sewage treatment plants
Property with ADR class life of 20 years or more and less than 25 years
Municipal sewers
Property with ADR class life of 25 years or more
Property Class
Real Property (real estate)
27.5-year property Residential rental property (does not include hotels and motels)
39-year property Non-residential real property
20-year property
40
The useful life
Recovery Year 3-Year Property 5-Year Property 7-Year Property 10-Year Property 15-Year Property
1
33.33
20
14.29
10
5
2
44.45
3 14.81 *
4
5
6
7
32
24.49
18
9.5
19.2
17.49
12.49
14.4
11.52
9.22
7.37
8.55
7.7
6.93
6.23
7.41 11.52 *
11.52 8.93 *
5.76
8.92
8.93 6.55 *
4.46
9
10
11
5.90 *
6.55
5.9
6.56
6.55
3.28
5.91
5.9
5.91
12
5.9
13
14
5.91 over 9000

5.9
15
5.91
16
17
2.95
18
19
20
21
The 3-, 5-, 7-, and 10-year classes use 200% and the 15- and 20-year classes use 150% declining balance depreciation.
All classes convert to straight-line depreciation in the optimal year, shown with an asterisk (*).
A half-year depreciation is allowed in the first and last recovery years.
If more than 40% of the year's MACRS property is placed in service in the last three months, then a mid-quarter convention
Recovery Year
1
Feb-39
40
Month 1
2.461
2.564
0.107
Month 2
2.247
2.564
0.321
Month 3
2.033
2.564
0.535
Month 4
1.819
2.564
0.749
Month 5
1.605
2.564
0.963
The useful life is 39 years for nonresidential real property. Depreciation is straight line using the mid-month convention. Thu
20-Year Property
3.75
7.219
6.677
6.177
5.713
5.285
4.888
4.522
4.462 *
4.461
4.462
4.461
4.462
4.461
4.462
4.461
4.462
4.461
4.462
4.461
2.231
ing balance depreciation.
then a mid-quarter convention must be used with depreciation tables that are not shown here.
Month 6
Month 7 Month 8 Month 9 Month 10 Month 11 Month 12
1.391
1.177
0.963
0.749
0.535
0.321
0.107
2.564
2.564
2.564
2.564
2.564
2.564
2.564
1.177
1.391
1.605
1.819
2.033
2.247
2.461
the mid-month convention. Thus a property placed in service in January would be allowed 11 months depreciation for recovery Year 1.
iation for recovery Year 1.
Start Price per unit
$90
Price Decrease After Year

Price after year 4
4 Year
$80
Year
1
2
3
4
5
6
7
8
Projected Unit Sales

13,000
15,000
16,000
16,500
16,000
15,000
14,000
13,000
VC each year
$55
Cost Increases After Year
5
Cost after year 5
$60
Total Fixed Cost Each Year
$35,000
NWC requirement at start
$15,000
NWC requirement during each year
is 17.00% of previous year's
estimated sales.
0.17
Initial Cost Equipment
$1,100,000
Depreciation Method
MACRS
Property Type
Class
# of years until sell Equipment
8
Value as % in 8 years
0.1
Selling Price
Relevant Marginal Tax Rate
0.34
Full Cash Flows At Time of Sale
RRR
0.2
Pro Forma Information

Units
0
1
2
3
4
5
6
7
8
Unit Price
Total Sales
VC / unit
Total VC
FC
Depr
Total
MACRS down zero
EBIT
Taxes
NI not considering
Interest
Total NWC needed Cash Flows ==> OCF

$15,000
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
CF for NWC
Cap Spending
Cumulative CF for
Cash Flow For NPV Payback
Period
0
1
2
3
4
5
6
7
8
NPV
IRR
Payback
Start Price per unit
$90
Price Decrease After Year

Price after year 4
4 Year
$80
Year
1
2
3
4
5
6
7
8
Projected Unit Sales

13,000
15,000
16,000
16,500
16,000
15,000
14,000
13,000
VC each year
$55
Cost Increases After Year
5
Cost after year 5
$60
Total Fixed Cost Each Year
$35,000
NWC requirement at start
$15,000
NWC requirement during each year
is 17.00% of previous year's
estimated sales.
0.17
Initial Cost Equipment
$1,100,000
Depreciation Method
MACRS
Property Type
Class
7-Year
# of years until sell Equipment
8
Value as % in 8 years
0.1
Selling Price
$110,000
Relevant Marginal Tax Rate
0.34
Full Cash Flows At Time of Sale
72600
RRR
0.2
Pro Forma Information

Units
0
1
2
3
4
5
6
7
8
Unit Price
13,000
15,000
16,000
16,500
16,000
15,000
14,000
13,000
$
$
$
$
$
$
$
$
90.00
90.00
90.00
90.00
80.00
80.00
80.00
80.00
Total Sales
$
$
$
$
$
$
$
$
1,170,000.00
1,350,000.00
1,440,000.00
1,485,000.00
1,280,000.00
1,200,000.00
1,120,000.00
1,040,000.00
VC / unit
$
$
$
$
$
$
$
$
55.00
55.00
55.00
55.00
55.00
60.00
60.00
60.00
Total VC
$
$
$
$
$
$
$
$
715,000.00
825,000.00
880,000.00
907,500.00
880,000.00
900,000.00
840,000.00
780,000.00
FC
Depr
$35,000
$35,000
$35,000
$35,000
$35,000
$35,000
$35,000
$35,000
$
$
$
$
$
$
$
$
EBIT
157,190.00
269,390.00
192,390.00
137,390.00
98,230.00
98,120.00
98,230.00
49,060.00
Total
$ 1,100,000.00
MACRS down zero
$
$
$
$
$
$
$
$
262,810.00
220,610.00
332,610.00
405,110.00
266,770.00
166,880.00
146,770.00
175,940.00
Taxes
$
$
$
$
$
$
$
$
89,355.00
75,007.00
113,087.00
137,737.00
90,702.00
56,739.00
49,902.00
59,820.00
NI not considering
Interest
$
$
$
$
$
$
$
$
173,455.00
145,603.00
219,523.00
267,373.00
176,068.00
110,141.00
96,868.00
116,120.00
Total NWC needed

$15,000
$
198,900.00
$
229,500.00
$
244,800.00
$
252,450.00
$
217,600.00
$
204,000.00
$
190,400.00
$
176,800.00
Cash Flows ==> OCF

Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
Cash Flows ==>
$
$
$
$
$
$
$
$
330,645.00
414,993.00
411,913.00
404,763.00
274,298.00
208,261.00
195,098.00
165,180.00
CF for NWC
($15,000)
$ (183,900.00)
$ (30,600.00)
$ (15,300.00)
$ (7,650.00)
$ 34,850.00
$ 13,600.00
$ 13,600.00
$ 190,400.00
Cap Spending
Period
($1,100,000)
0
1
2
3
4
5
6
7
72,600.00
8
Cash Flow For NPV

$ (1,115,000.00)
$
146,745.00
$
384,393.00
$
396,613.00
$
397,113.00
$
309,148.00
$
221,861.00
$
208,698.00
$
428,180.00
NPV
IRR
Payback
$51,622.68
21.46%
3.47
Payback
Payback
Payback
3.472
3.472
3.472
Cumulative CF for
Payback
$ (1,115,000.00)
$ (968,255.00)
$ (583,862.00)
$ (187,249.00)
$
209,864.00
$
519,012.00
$
740,873.00
$
949,571.00
$ 1,377,751.00
0
1
2
3
4
5
6
7
8
Initial Cost
1000
Cash Flows
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
-1,000
500
400
500
200
500
0
0
Cumulative Cash Flows

-1,000
-500
-100
400
600
1,100
1,100
1,100
Payback
2.2
Payback In Years
Years
Last one <=0
next period Cash Flow
2.2
2.2
2
100
500
No Zero?
Payback
0
2.2
Cost Savings Example / as opposed to a sales example. Both are Net Marginal Benefits
Cost
$520,000.00
Years
5
Depr Method
SL
Salvage for Depr
0
Annual Depr Expense
Sell Price at end of life
$40,000.00
Pre-taxed COST Savings
per year (Like Cash In
because it is a savings)
$160,000.00
Reduce NWC (positive
Cash Flow at Beginning)
$35,000.00
Tax Rate
0.35
RRR
0.125
Year
OCF
NWC
Cap Spending
0
1
2
3
4
NPV
IRR
Marginal Benefits
Total CF
Cost Savings Example / as opposed to a sales example. Both are Net Marginal Benefits
Cost
$520,000.00
Years
5
Depr Method
SL
Salvage for Depr
0
Annual Depr Expense
$104,000.00
$40,000.00
Pre-taxed COST Savings
per year (Like Cash In
because it is a savings)
$160,000.00
Reduce NWC (positive
Cash Flow at Beginning)
$35,000.00
Tax Rate
0.35
RRR
0.125
Year
OCF
0
1
2
3
4
NWC
Cap Spending
$35,000.00 ($520,000.00)
$140,400.00
$140,400.00
$140,400.00
$140,400.00
5 $140,400.00
($35,000.00)
$26,000.00
NPV
IRR
Marginal Benefits
Total CF
($485,000.00)
$140,400.00
$140,400.00
$140,400.00
$140,400.00
$131,400.00
$9,909.43
13.33%
Pessimistic
Range of Values +/10.0%
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
OCF: Pessimistic case.
NPV: Pessimistic case.
Check:
ProForma Income
Sales
VC
FC
Depr
EBIT
Tax
NI
OCF
Base
10.00%
$ 1,200,000.00
5
SL
0
0.35
0.15
10,000
$ (1,201,304.35)
Cost
$
Years
Depr Method
SL
Salvage
Depre Ex
Unit Sales per year
Price per unit
$
VC per unit
$
FC per year
$
Tax Rate
RRR
NWC (time zero -, time last +)
0
90,000
43.00
29.00
800,000.00
0.35
0.15
10,000
OCF: Base case.

NPV: Base case.
Time
$ 3,870,000.00
$ 2,610,000.00
$
800,000.00
$
$
460,000.00
$
161,000.00
$
299,000.00
$
299,000.00
1,200,000.00
5
0
1
2
3
4
5
NPV
CF
$
$
$
$
$
$
(1,210,000.00)
299,000.00
299,000.00
299,000.00
299,000.00
299,000.00
(207,705.63)
Optimistic
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
OCF: Optimistic case.
NPV: Optimistic case.
$ 1,200,000.00
5
SL
0
0.35
0.15
10,000
NPV
3
4
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
OCF
NPV
1,200,000.00
5
SL
$
$
$
$
$
$
0
240,000.00
99,000
47.30
26.10
720,000.00
0.35
0.15
10,000
980,220.00
2,080,821.24
Pesimistic Optimistic
81000
99000
38.7
47.3
31.9
26.1
880000
720000
Pessimistic
Range of Values +/- 10.0%
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
OCF: Pessimistic case.
NPV: Pessimistic case.
Base
10.00%
$ 1,200,000.00
5
SL
0
$
240,000.00
81,000
$
38.70
$
31.90
$
880,000.00
0.35
0.15
10,000
$ (129,980.00)
$ (1,640,741.35)
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
OCF: Base case.
NPV: Base case.
Skewed toward Positive Side, but with a loss of -$1,640,741 on the down sid
before taking this project. Maybe look at the past to see the volatility of VC a
the VC industry.
Check:
ProForma Income
Sales
VC
FC
Depr
EBIT
Tax
NI
OCF
Time
$ 3,870,000.00
$ 2,610,000.00
$
800,000.00
$
240,000.00
$
220,000.00
$
77,000.00
$
143,000.00
$
383,000.00
0
1
2
3
4
5
NPV
Optimistic
$
1,200,000.00
5
$
$
$
0
240,000.00
90,000
43.00
29.00
800,000.00
0.35
0.15
10,000
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
$
$
383,000.00
78,847.17
OCF: Optimistic case.

NPV: Optimistic case.
SL
$
640,741 on the down

this project. Maybe
ture economic data
CF
$
$
$
$
$
$
(1,210,000.00)
383,000.00
383,000.00
383,000.00
383,000.00
383,000.00
73,875.40
$ 1,200,000.00
5
SL
0
$ 240,000.00
99,000
$
47.30
$
26.10
$ 720,000.00
0.35
0.15
10,000
$ 980,220.00
$ 2,080,821.24
Sensitivity Analysis
Cost
Salvage
Years
Depr
Depr Ex
RRR
Tax rate
No NWC
$ 250,000.00
0
5
SL
0.15
0.34
0
Units Sold
Price per unit
VC per unit
FC per year
Pessimistic
Base
9,000.00
$
$
$
Optimistic
10,000.00
72.00
55.00
75,000.00
11,000.00
OCF
NPV
Sensitivity Analysis - As Changes, What Does NPV do?
The Steeper the line, the more forecast risk associated with variable.
Pessimistic
Base
Optimistic
Steepness = Slope
*For everyone unit of x, how far does y move?
Sales will always be a Direct Relationship
Costs will always be a Indirect Relationship
Cost
Salvage
Years
Depr
Depr Ex
RRR
Tax rate
No NWC
$ 250,000.00
0
5
SL
$ 50,000.00
0.15
0.34
0
Units Sold
Price per unit
VC per unit
FC per year
OCF
NPV
Pessimistic
Base
9,000.00
$
$
$
$ 68,480.00 $
$ (20,444.42) $
Optimistic
10,000.00
72.00
55.00
75,000.00
11,000.00
79,700.00 $
17,166.76 $
90,920.00
54,777.94
Sensitivity Analysis - As Units Sold Changes, What Does NPV do?

The Steeper the line, the more forecast risk associated with variable.
Units Sold
NPV
Pessimistic
9000 $ (20,444.42)
The Steeper the line, the more fore
Base
10000 $
17,166.76
$60,000.00
Optimistic
11000 $
54,777.94
$50,000.00
Steepness = Slope
37.6111802
*For everyone unit of x, how far does y move?
$40,000.00
$30,000.00
$20,000.00
Sales will always be a Direct Relationship

Costs will always be a Indirect Relationship
$10,000.00
$$(10,000.00)8500
$(20,000.00)
$(30,000.00)
9000
Sensitivity Analysis - As Units Sold Changes, What Does NPV do?

he Steeper the line, the more forecast risk associated with variable.
9000
9500
10000
10500
11000
11500
Sales 2nd year

Costs as % of Sales
Costs
Depr Ex
Tax Rate
OCF
1432
0.7
80
0.34
Sales 2nd year

Costs as % of Sales
Costs
Depr Ex
Tax Rate
OCF
1432
0.7
1002
80
0.34
311
Cosrs
Life (years)
Salvage
Depr Method
$ 500,000.00
5
0
SL
RRR
Tax Rate
Unit Sales per year
Price per unit
VC per unit
FC per year
NWC required
Sales, Price Down

Costs Up
0.15
0.34 Accurate to within
400
5%
$
3,000.00
5%
$
1,900.00
5%
$ 250,000.00
5%
0
Pessimistic
Type
Sales
Units
Cost
Cost
Base
Optimistic
Cash Flows
Pessimistic
Base
Optimistic
Total Sales
Total VC
Total FC
Depr
EBIT
Taxes
NI (no Interest)
OCF
NWC
Year
0
1
2
3
4
5
NPV
Now we have a range of numbers we can look at.
Lower
Pessimistic
Base
Base
Sales, Units Up
Costs Down
Upper
Optimistic
Cosrs
Life (years)
Salvage
Depr Method
$ 500,000.00
5
0
SL
$ 100,000.00
RRR
0.15
Tax Rate
0.34 Accurate to within
Unit Sales per year
400
5%
Price per unit
$
3,000.00
5%
VC per unit
$
1,900.00
5%
FC per year
$ 250,000.00
5%
NWC required
0
Type
Sales
Units
Cost
Cost
Pessimistic
Base
Optimistic
$ 1,083,000.00 $ 1,200,000.00 $ 1,323,000.00
758,100.00
760,000.00
758,100.00
262,500.00
250,000.00
237,500.00
100,000.00
100,000.00
100,000.00
(37,600.00)
90,000.00
227,400.00
(12,784.00)
30,600.00
77,316.00
(24,816.00)
59,400.00
150,084.00
75,184.00
159,400.00
250,084.00
-
Total Sales
Total VC
Total FC
Depr
EBIT
Taxes
NI (no Interest)
OCF
NWC
Year
0
1
2
3
4
5
NPV
Sales, Price Down

Costs Up
Cash Flows
Pessimistic
Base
$ (500,000.00) $
$ 75,184.00 $
$ 75,184.00 $
$ 75,184.00 $
$ 75,184.00 $
$ 75,184.00 $
$ (247,971.57) $
(500,000.00)
159,400.00
159,400.00
159,400.00
159,400.00
159,400.00
Optimistic
$ (500,000.00)
$ 250,084.00
$ 250,084.00
$ 250,084.00
$ 250,084.00
$ 250,084.00
34,333.52 $ 338,320.36
Now we have a range of numbers we can look at.
Lower
Pessimistic
Base
Base
380
400
2850 $ 3,000.00
$ 1,995.00 $ 1,900.00
$ 262,500.00 $ 250,000.00
Sales, Units Up
Costs Down
Upper
Optimistic
420
$ 3,150.00
$ 1,805.00
$ 237,500.00
9.01
9.02
9.10
The best alternative that you give up to take on a project. If you have a job and
you decide to go to school full time, you give up the job. Opportunity Costs must
be included in Cash Flow Analysis. Another example: If you have land that is
already paid for and you decide to use it for a Factory, you must include the
price you could have sold it for in the calculation. If the land could have been
9.01 sold for $100, but you chose to build the factory, you gave up $100.
I would prefer MACRS because it lets you deduct more of the cost in the early
years of the project which means lower taxes paid. These larger deductions
reduce taxes, but have no other cash consequences. Notice that the choice
between MACRS and straight-line is purely a time value issue; the total
9.02 depreciation is the same, only the timing differs.
Scenario Analysis is when you change a number of variables at once to see how
the NPV will change. It can help expose Forecasting risk for the whole project. It
is a way of "spreading out the numbers" to get a better overall picture. For
pesimistic cases Sales and Units down and Costs up. For Optimistic cases Sales
and Units Up and Costs Down. Sensitivity Analysis is when you change just one
variable. The steeper the slope of the line the more sensitive NPV is to changes
9.10 in the variable. This helps to expose the forecast risk for individual variables.
Relevant Costs
Land MV today
Build New Plant on Land
Total Fixed Asset
$ 7,000,000.00
$ 9,800,000.00
$ 21,000,000.00
$
850,000.00
Cash Flow Out For Project
Sunk Cost Not Relevant

OpportunityRelevant
Cost
Relevant Costs
Land MV today
Build New Plant on Land
$ 7,000,000.00 Sunk Cost

$ 9,800,000.00 Opportunity Cost
$ 21,000,000.00 Cost Today - Cash Out
$
850,000.00 Cost Today - Cash Out
Total Fixed Asset
$ 31,650,000.00 Cash Flow Out For Project
Not Relevant
Relevant
Relevant
Relevant
Sunk Cost
Not Relevant
Opportunity Cost
Relevant
Erosion
Product
Units Sold
Price
Change If New Line Introduced
Motor Homes
28,000 $ 73,000.00
2,600
Luxury Motor Coaches
7,000 $ 115,000.00
(850)
New Line
23,000 $ 19,000.00
Change in CF
Motor Homes
New Line
Erosion
Sales
Erosion
Product
Units Sold
Price
Change If New Line Introduced
Motor Homes
28,000 $ 73,000.00
2,600
7,000 $ 115,000.00
(850)
New Line
23,000 $ 19,000.00
Motor Homes
New Line
Erosion
Change in CF
$ 189,800,000.00
$ (97,750,000.00)
$ 437,000,000.00
$ 529,050,000.00
Sales
$ 2,044,000,000.00
$ 805,000,000.00
$ 437,000,000.00
Old Product
Price Old Sound Board
Old Sound Board Current Yearly Units Sold =
If New Unit Sold, Old Sound Board Yearly Units Sold =
New Product
Price New Sound Board
Expected Units Sold for New Sound Board
VC as % of Sales
Depr on New Sound Board
FC for New Sound Board
Tax Rate
Goal:
Erosion In Sales From Old Sound Board
Erosion In VC From Old Sound Board
Sales From New Sound Board
Total VC for New Sound Board
Total FC for New Sound Board
Depr for New Sound Board
EBIT
Tax
OCF
Old Sound Board

$
21,400.00
1,900
1,720
New Sound Board
$
25,500.00
1,400
55%
$
1,350,000.00
$
1,250,000.00
0.38
What is annual OCF?
Old Product
Price Old Sound Board
Old Sound Board Current Yearly Units Sold =
If New Unit Sold, Old Sound Board Yearly Units Sold =
New Product
Price New Sound Board
Expected Units Sold for New Sound Board
VC as % of Sales
Depr on New Sound Board
FC for New Sound Board
Tax Rate
Goal:
Erosion In Sales From Old Sound Board
Erosion In VC From Old Sound Board
Sales From New Sound Board
Total VC for New Sound Board
Total FC for New Sound Board
Depr for New Sound Board
EBIT
Tax
OCF
Old Sound Board

$
21,400.00
1,900
1,720
New Sound Board
$
25,500.00
1,400
55%
$
1,350,000.00
$
1,250,000.00
0.38
What is annual OCF?
$
$
$
$
$
$
$
$
$
(3,852,000.00)
2,118,600.00
35,700,000.00
19,635,000.00
1,250,000.00
1,350,000.00
11,731,600.00
4,458,008.00
8,623,592.00
Years
Initial Cost
Depr Method
Salvage
Annual Sales
Annual Costs
Tax Rate
RRR
$
SL
3
2,100,000.00
Time
Cash Flow 0
Cash Flow 1
Cash Flow 2
Cash Flow 3
0
2150000
1140000
0.35
0.14
Cap Spending
tax shield method

9 OCF
10 NPV
or
or
NPV
11 NWC
Salvage Value
Cap Spending
$
$
150,000.00
175,000.00 Since Book value is zero, this sale is a gain and is taxable.
OCF
NWC
Total Cash Flows
Cash Flow 0
Cash Flow 1
Cash Flow 2
Cash Flow 3
NPV
12
Class
Example1
Example2
3-Year
Research Equipment
Special Tools
5-Year
Autos
Computers
7-Year
Office Furniture
Years
3-Year
1
2
3
4
5
6
7
8
Sales
Cash Flow 0
Cash Flow 1
Class
5-Year
7-Year
0.3333
0.2
0.4445
0.32
0.1481
0.192
0.0741
0.1152
0.1152
0.0576
VC + FC
Depr
Beg BV
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
EBIT
TAX
Cash Flow 2
Cash Flow 3
d is taxable.
Depreciation
End BV
OCF
NWC
Cap Spening
Total Cash Flows
NPV
*textbook forgot to ROUND
Years
Initial Cost
Depr Method
Salvage
Annual Sales
Annual Costs
Tax Rate
RRR
9 OCF
10 NPV
11 NWC
Salvage Value
NPV
$
$
Cap Spending
OCF
$ (2,100,000.00)
$
$
$
113,750.00 $
$
Time
Cash Flow 0
Cash Flow 1
Cash Flow 2
Cash Flow 3
0
2150000
1140000
0.35
0.14
$
$
or
$
NPV
Cash Flow 0
Cash Flow 1
Cash Flow 2
Cash Flow 3
$
SL
3
2,100,000.00
Cap Spending
$ (2,100,000.00)
$ 901,500.00
$ 901,500.00
$ 901,500.00
tax shield method

901500
901,500.00 or
(7,048.73)
(7,048.73)
150,000.00
175,000.00 Since Book value is zero, this sale is a gain and is taxable.
NWC
Total Cash Flows
$
(150,000.00) $ (2,250,000.00)
901,500.00
$ 901,500.00
901,500.00
$ 901,500.00
901,500.00 $
150,000.00 $ 1,165,250.00
20,975.01
12
Class
Example1
Example2
3-Year
Research Equipment
Special Tools
5-Year
Autos
Computers
7-Year
Office Furniture
Years
3-Year
1
2
3
4
5
6
7
8
Sales
Cash Flow 0
Cash Flow 1
Class
5-Year
7-Year
0.3333
0.2
0.4445
0.32
0.1481
0.192
0.0741
0.1152
0.1152
0.0576
VC + FC
$ 2,150,000.00 $
Depr
1,140,000.00 $
Beg BV
$ 2,100,000.00
$ 1,400,070.00
$ 466,620.00
$ 155,610.00
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
EBIT
699,930.00 $
TAX
310,070.00 $
108,525.00
Cash Flow 2
Cash Flow 3
$ 2,150,000.00 $
$ 2,150,000.00 $
1,140,000.00 $
1,140,000.00 $
933,450.00 $
311,010.00 $
76,550.00 $
698,990.00 $
26,793.00
244,647.00
d is taxable.
Depreciation
$ 699,930.00
$ 933,450.00
$ 311,010.00
$ 155,610.00
$ 2,100,000.00
OCF
$
End BV
$ 1,400,070.00
$ 466,620.00
$ 155,610.00
$
-
NWC
Cap Spening
Total Cash Flows
$ (150,000.00) $ (2,100,000.00) $ (2,250,000.00)
901,475.00
$
901,475.00
$
$
983,207.00
765,353.00 $
150,000.00 $
NPV
$
168,214.00 $
983,207.00
1,083,567.00
28,690.27
*textbook forgot to ROUND
Cost Savings Example / as opposed to a sales example. Both are Net Marginal Benefi
Cost Of Equipment
Depreciation Method
Salvage Value for Depr Calculation
Annual Depr
Salvage Value
Pretaxed Cost Savings per Year
Tax Rate
NWC Needed for Fist Year
Discount Rate
Years
$
SL
625,000.00
0
$
$
$
Period
OCF
95,000.00
183,000.00 This is a Marginal Benefit
0.34
41,000.00
8.00%
5
NWC
Cap Spending
0
1
2
3
4
5
NPV
e Net Marginal Benefits
Total CF
Cost Savings Example / as opposed to a sales example. Both are Net Marginal Benefi
Cost Of Equipment
Depreciation Method
Salvage Value for Depr Calculation
Annual Depr
Salvage Value
Pretaxed Cost Savings per Year
Tax Rate
NWC Needed for Fist Year
Discount Rate
Years
$
SL
$
$
$
Period
OCF
0
1
2
3
4
5
$
$
$
$
$
625,000.00
0
125000
95,000.00
183,000.00 This is a Marginal Benefit
0.34
41,000.00
8.00%
5
NWC
Cap Spending
$
(41,000.00) $
(625,000.00)
163,280.00
163,280.00
163,280.00
163,280.00
163,280.00 $
41,000.00 $
NPV
62,700.00
e Net Marginal Benefits
Total CF
$
(666,000.00)
$
163,280.00
$
163,280.00
$
163,280.00
$
163,280.00
$
266,980.00
$
56,506.17
14 Cost
Years
Depr Method
Salvage for Depr
Annual Depr Expense
Pre-taxed COST Savings per year (Like
Cash In because it is a savings)
Reduce NWC (positive Cash Flow at
Beginning)
Tax Rate
RRR
$520,000.00
5
SL
0
Year
OCF
$40,000.00
0
1
2
3
4
$160,000.00
$35,000.00
0.35
0.1
NWC
Cap Spending
IRR
NPV
Total CF
14 Cost
Years
Depr Method
Salvage for Depr
Annual Depr Expense
Beginning)
Tax Rate
RRR
$520,000.00
5
SL
0
$104,000.00
$40,000.00
$160,000.00
$35,000.00
0.35
0.1
Year
OCF
0
1
2
3
4
$140,400.00
$140,400.00
$140,400.00
$140,400.00
5 $140,400.00
NWC
Cap Spending Total CF
$35,000.00 ($520,000.00) ($485,000.00)
$140,400.00
$140,400.00
$140,400.00
$140,400.00
($35,000.00)
$26,000.00
IRR
NPV
$131,400.00
13.33%
14 Cost
Years
Depr Method
Salvage for Depr
Annual Depr Expense
Beginning)
Tax Rate
RRR
$520,000.00
5
SL
0
Year
OCF
$40,000.00
0
1
2
3
4
$190,000.00
$35,000.00
0.35
0.1
NWC
Cap Spending
IRR
NPV
Total CF
14 Cost
Years
Depr Method
Salvage for Depr
Annual Depr Expense
Beginning)
Tax Rate
RRR
$520,000.00
5
SL
0
$104,000.00
$40,000.00
$190,000.00
Year
OCF
0
1
2
3
4
$159,900.00
$159,900.00
$159,900.00
$159,900.00
5 $159,900.00
$35,000.00
0.35
0.1
Accept Project if pre-taxed savings are $190,
NWC
$35,000.00 ($520,000.00) ($485,000.00)
$159,900.00
$159,900.00
$159,900.00
$159,900.00
($35,000.00)
$26,000.00
IRR
NPV
-taxed savings are $190,000.00
$150,900.00
19.01%
$115,558.51
14 Cost
Years
Depr Method
Salvage for Depr
Annual Depr Expense
Beginning)
Tax Rate
RRR
$520,000.00
5
SL
0
Year
OCF
$40,000.00
0
1
2
3
4
$130,000.00
$35,000.00
0.35
0.1
NWC
Cap Spending
IRR
NPV
Total CF
14 Cost
Years
Depr Method
Salvage for Depr
Annual Depr Expense
Beginning)
Tax Rate
RRR
$520,000.00
5
SL
0
$104,000.00
$40,000.00
$130,000.00
Year
OCF
0
1
2
3
4
$120,900.00
$120,900.00
$120,900.00
$120,900.00
5 $120,900.00
$35,000.00
0.35
0.1
Reject Project if pre-taxed savings are $130,0
NWC
$35,000.00 ($520,000.00)
-485000
120900
120900
120900
120900
($35,000.00)
$26,000.00
IRR
NPV
taxed savings are $130,000.00
111900
7.33%
($32,282.17)
Units Estimates to sell

Price per unit
VC per Unit
Year FC
Variation
70000
$1,070.00
$290.00
$4,800,000.00
0.15
Pessimistic
Units
Price
VC
FC
Base
Optimistic
Units Estimates to sell

Price per unit
VC per Unit
Year FC
Variation
70000
$1,070.00
$290.00
$4,800,000.00
0.15
Pessimistic
Units
Price
VC
FC
Base
Optimistic
59500
70000
80500
$
909.50
$1,070.00 $
1,230.50
$
333.50
$290.00 $
246.50
$ 5,520,000.00 $ 4,800,000.00 $ 4,080,000.00
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
CFO: Base Case
Decrease in unit sales
CFO: Base Case - 500 Units Sales
$ 1,350,000.00
6
SL
0
$
$
$
Periods
87,000
34.25
20.50
750,000.00
0.35
0.11
??
Periods
500
CFO
NWC
CFO
NWC
0
1
2
3
4
5
6
0
1
2
3
4
5
6
NPV: Base Case - 500 Units Sales
Difference due to drop of 500 units.
Drop in Value Added per one unit of sales drop
Not asked for in problem:
Increase in unit sales
CFO: Base Case + 500 Units Sales
NPV: Base Case + 500 Units Sales
Difference due to increase of 500 units.
Cap Spending
Total Cash Flow
NPV - Base
Cap Spending
Total Cash Flow
Sensitivity of NPV to a 1 units change
$
$
$
$
500
294,531.25
(103,974.40)
(103,974.40)
(207.95) Sensitivity of NPV to a 1 units change
Check:
0
1
2
3
4
5
6
NPV
-1350000
$ 294,531.25
$ 294,531.25
$ 294,531.25
$ 294,531.25
$ 294,531.25
$ 294,531.25
($103,974.40)
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
CFO: Base Case
Decrease in unit sales
CFO: Base Case - 500 Units Sales
$ 1,350,000.00
6
SL
0
$ 225,000.00
87,000
$
34.25
$
20.50
$ 750,000.00
0.35
0.11
??
$ 368,812.50
500
$ 364,343.75
Periods
CFO
0
1
2
3
4
5
6
Periods
$
$
$
$
$
$
NWC
368,812.50
368,812.50
368,812.50
368,812.50
368,812.50
368,812.50
CFO
0
1
2
3
4
5
6
$
$
$
$
$
$
NWC
364,343.75
364,343.75
364,343.75
364,343.75
364,343.75
364,343.75
NPV: Base Case - 500 Units Sales

Difference due to drop of 500 units.
Not asked for in problem:
Increase in unit sales
CFO: Base Case + 500 Units Sales
NPV: Base Case + 500 Units Sales
Difference due to increase of 500 units.
Cap Spending
Total Cash Flow
$ (1,350,000.00)
-1350000
368812.5
368812.5
368812.5
368812.5
368812.5
368812.5
NPV - Base
$210,275.24
Cap Spending
Total Cash Flow
$ (1,350,000.00)
-1350000
364343.75
364343.75
364343.75
364343.75
364343.75
364343.75
$191,370.03
$18,905.22
$37.81 Sensitivity of NPV to a 1 units change
$
$
$
$
500
373,281.25
229,180.46
18,905.22
37.81 Sensitivity of NPV to a 1 units change
Check:
0
1
2
3
4
5
6
NPV
-1350000
$ 373,281.25
$ 373,281.25
$ 373,281.25
$ 373,281.25
$ 373,281.25
$ 373,281.25
$229,180.46
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
FC per year
Tax Rate
RRR
NWC
$ 1,350,000.00
6
SL
0
$ 225,000.00
87,000
$
34.25
$ 750,000.00
0.35
0.11
??
VC per unit
CFO: Base Case
$
$
20.50
368,812.50
Change
VC per unit add $1
CFO: Base Case
Change
$
$
$
$
1.00
21.50
312,262.50
56,550.00
For a $1 change in VC, OCF will change by $56,550.00
Change
VC per unit subtract $1
CFO: Base Case
Change
$
$
$
$
1.00
19.50
425,362.50
(56,550.00)
hange by $56,550.00
hange by $56,550.00
Check:
0
1
2
3
4
5
6
NPV
-1350000
$
$
$
$
$
$
############
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
FC per year
Tax Rate
RRR
NWC
$ 1,350,000.00
6
SL
0
$ 225,000.00
87,000
$
34.25
$ 750,000.00
0.35
0.11
??
VC per unit
CFO: Base Case
$
$
20.50
368,812.50
Change
VC per unit add $1
CFO: Base Case
Change
$
$
$
$
1.00
21.50
312,262.50
56,550.00
Change
VC per unit subtract $1
CFO: Base Case
Change
$
$
$
$
1.00
19.50
425,362.50
(56,550.00)
hange by $56,550.00
hange by $56,550.00
Check:
0
1
2
3
4
5
6
NPV
-1350000
$
$
$
$
$
$
############
Pessimistic
Base

Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
CFO: Base Case
NPV
10.00%
$ 1,350,000.00
6
SL
0
$
225,000.00
0.35
0.11
??
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
CFO: Base Case
NPV
Optimistic
$ 1,350,000.00
6
SL
0
$ 225,000.00
87,000
$
34.25
$
20.50
$ 750,000.00
0.35
0.11
??
$
$
368,812.50
210,275.24
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
CFO: Base Case
NPV
$ 1,350,000.00
6
SL
0
$ 225,000.00
0.35
0.11
??
NPV
3
4
#REF!
#REF!
5
6
#REF!
#REF!
#REF!
#REF!
#REF!
Pessimistic
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
CFO: Base Case
NPV
Base
10.00%
$ 1,350,000.00
6
SL
0
$
225,000.00
78,300
$
30.83
$
22.55
$
825,000.00
0.35
0.11
??
$
(36,343.88)
$ (1,503,754.14)
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
CFO: Base Case
NPV
Skewed toward Positive Side, but with a loss of -$1,503,754 on the down si
closer before taking this project. Maybe look at the past to see the volatility
data about the VC industry.
Optimistic
$ 1,350,000.00
6
SL
0
$ 225,000.00
87,000
$
34.25
$
20.50
$ 750,000.00
0.35
0.11
??
$
$
368,812.50
210,275.24
,503,754 on the
aking this project.
and to future
Cost
Years
Depr Method
Salvage
Depre Ex
Unit Sales per year
Price per unit
VC per unit
FC per year
Tax Rate
RRR
NWC
CFO: Base Case
NPV
$ 1,350,000.00
6
SL
0
$ 225,000.00
95,700
$
37.68
$
18.45
$ 675,000.00
0.35
0.11
??
$ 835,891.13
$ 2,186,269.05
NPV
3
4
#REF!
#REF!
5
6
#REF!
#REF!
#REF!
#REF!
#REF!
Marketing Survey to determine viability of Product

Sales per year
Total VC as % of Total Sales
Total FC
Cost of Equipment
Years
Depr Method
Salvage for Depr
Depr Ex
NWC
Tax Rate
RRR
OCF
NPV
IRR
Payback
120,000 Sunk Cost - Not Relevant

$575,000
20%
$179,000
$620,000
4
SL
0
???
0.4
0.13
Cash Flows For IRR
0
Marketing Survey to determine viability of Product

Sales per year
Total FC
Cost of Equipment
Years
Depr Method
Salvage for Depr
Depr Ex
NWC
Tax Rate
RRR
OCF
NPV
IRR
Payback
120,000 Sunk Cost - Not Relevant

$575,000
20%
$115,000
$179,000
$620,000
4
SL
0
155000
???
0.4
0.13
$230,600
$65,913.09
18%
2.68863833
Cash Flows For IRR

0
1
($620,000)
230600
2
230600
3
230600
4
230600
Years
Cost of Machine
Annual Pre-taxed Cost Savings
Depr Method
Property Class for MACRS
Selling Price at end
Initial Investment in NWC (parts inventory)
Each Year increase in NWC (inventory)
Tax Rate
RRR
4
$485,000.00
$184,000.00
MACRS
5-Year
$55,000
$21,000.00
$3,000.00
0.34
0.11
Depreciation and Book Value Schdule

Years
Depr
Years
OCF
0
1
2
3
4
End Book Value
0
1
2
Sell price
year 4
3
4
5
6
NWC Schdule
Years
NWC needed
Change in NWC
0
1
2
3
4
Total
Class
3-Year
5-Year
7-Year

Example1
Example2
Research Equipment
Special Tools
Autos
Computers
Office Furniture
Years
Class
5-Year
3-Year
1
2
3
4
5
6
7
8
0.3333
0.4445
0.1481
0.0741
0.2
0.32
0.192
0.1152
0.1152
0.0576
7-Year
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
NWC
Cap Spending
Total CF
NPV
Loss on Sale Tax Benefit
Total Cash In
Years
Cost of Machine
Annual Pre-taxed Cost Savings
Depr Method
Property Class for MACRS
Selling Price at end
Initial Investment in NWC (parts inventory)
Each Year increase in NWC (inventory)
Tax Rate
RRR
4
$485,000.00
$184,000.00
MACRS
5-Year
$55,000
$21,000.00
$3,000.00
0.34
0.11
Depreciation and Book Value Schdule

Years
Depr
0
1
2
NWC Schdule
Years
0
1
2
3
4
Class
3-Year
5-Year
7-Year
OCF
0
1
2
3
4
93120
55872
55872
27936
$388,000.00
$232,800.00
Sell price
year 4
$55,000
$139,680.00
$83,808.00
$27,936.00
$.00
NWC needed
Change in NWC
-$21,000.00
-$21,000.00
-$24,000.00
-$3,000.00
-$27,000.00
-$3,000.00
-$30,000.00
-$3,000.00
-$33,000.00
-$3,000.00
Total
-$33,000.00

Example1
Example2
Research Equipment
Special Tools
Autos
Computers
Office Furniture
Years
Class
5-Year
3-Year
1
2
3
4
5
6
7
8
154420
174208
153100.8
140436.48
End Book Value

97000
155200
3
4
5
6
Years
0.3333
0.4445
0.1481
0.0741
0.2
0.32
0.192
0.1152
0.1152
0.0576
7-Year
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
NWC
-$21,000.00 -$485,000.00
-506000
-$3,000.00
151420
-$3,000.00
171208
-$3,000.00
150100.8
$30,000.00
$64,795.00
235231.48
NPV
$34,077.34
Loss on Sale Tax Benefit

Total Cash In
($28,808.00)
$9,795.00
$64,795.00
Research and Development on Golf Club 3

Marketing Study
NEW Product 3
Price of Golf Club 3
VC for Golf Club 3
Estimate of # units sold per year for Golf Club 3
Gross Profits (Sales - Total VC) of Golf Club 3
OLD Product 1
VC for Golf Club 1
Lost # units sold of Golf Club 1
OLD Product 2
VC for Golf Club 2
Gained # units sold of Golf Club 2
Total FC
Cost of New Equipment
Deprecation Method
Salvage Value For Depr
Depr Ex
Years
RRR
Tax Rate
Year 1 increase in NWC
OCF
NPV
IRR
Payback
$ 1,000,000.00 Sunk Cost Not Relevant

$
150,000.00 Sunk Cost Not Relevant
Golf Club 3
$
730.00
$
360.00
75000
Golf Club 1
$
1,200.00
$
540.00
8500 Erosion - Must consider in calculations
Golf Club 2
$
340.00
$
125.00
11000 Negative Erosion - Must consider in calculations
$ 11,200,000.00
$ 24,500,000.00
SL
0
7
0.14
0.4
1,500,000.00
CF
Cummulative CF
Not Relevant
Not Relevant
Must consider in calculations
Erosion - Must consider in calculations
Cash Flows
0
1
2
$ (26,000,000.00)
0
0
$ (26,000,000.00) $ (26,000,000.00) $ (26,000,000.00)
3
4
0
0
############ $ (26,000,000.00)
5
6
7
0
0 $ 1,500,000.00
$ (26,000,000.00) $ (26,000,000.00) $ (24,500,000.00)
Research and Development on Golf Club 3

Marketing Study
NEW Product 3
VC for Golf Club 3
Estimate of # units sold per year for Golf Club 3
OLD Product 1
VC for Golf Club 1
Lost # units sold of Golf Club 1
OLD Product 2
VC for Golf Club 2
Gained # units sold of Golf Club 2
Total FC
Cost of New Equipment
Deprecation Method
Salvage Value For Depr
Depr Ex
Years
RRR
Tax Rate
Year 1 increase in NWC
OCF
NPV
IRR
Payback
$ 1,000,000.00
$
150,000.00
Golf Club 3
$
730.00
$
360.00
75000
$ 27,750,000.00
Golf Club 1
$
1,200.00
$
540.00
8500
$ 5,610,000.00
Golf Club 2
$
340.00
$
125.00
11000
$ 2,365,000.00
$ 11,200,000.00
$ 24,500,000.00
SL
0
3500000
7
0.14
0.4
$ 1,500,000.00
9383000
$13,014,579.20
30.87%
2.770968773
2.770968773

Negative Erosion - Must consider in calculations
CF
Cummulative CF
Not Relevant
Not Relevant
Must consider in calculations
Cash Flows
0
1
2
3
4
$ (26,000,000.00)
9383000
9383000
9383000
9383000
$ (26,000,000.00) $ (16,617,000.00) $ (7,234,000.00) $ 2,149,000.00 $ 11,532,000.00
5
6
7
9383000
9383000 $ 10,883,000.00
$ 20,915,000.00 $ 30,298,000.00 $ 41,181,000.00
Year
Unit Sales
0
1
2
3
4
5
Years
NWC 1st Year
NWC Required Each Year = ($ change in
sales from this year until next)*0.15
Total FC
VC per unit
Price per unit
Cost
Depr method
Property Class
# Years Until Equipment Sold
Value as % of historical cost in 5 years
Price when sold in 5 years
Marginal Tax Bracket
RRR
Sales
108,000
127,000
115,000
98,000
84,000
$
$
$
$
$
37,260,000.00
43,815,000.00
39,675,000.00
33,810,000.00
28,980,000.00
OCF
$
$
$
$
$
7,546,500.00
9,028,500.00
8,092,500.00
6,766,500.00
5,674,500.00
7
1,500,000.00
0.15
$ 1,350,000.00
$
225.00
$
345.00
$ 23,000,000.00
MACRS
7-Year
5
20%
0.35
0.18
MACRS Depreciation Schedule

Years
7-Year
1
2
3
4
5
6
7
8
Depr Ex
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
Total
NWC Schedule
Years
NWC needed
0
1
2
3
4
5
Change in NWC
End Book Value
NWC
$
$
$
$
$
$
Cap Spending
Total Cash
$ (23,000,000.00)
NPV
IRR
Price When sold
Loss
Tax Benefit
Total Cash In
Year
Unit Sales
0
1
2
3
4
5
Years
NWC 1st Year
NWC Required Each Year = ($ change in
sales from this year until next)*0.15
Total FC
VC per unit
Price per unit
Cost
Depr method
Property Class
# Years Until Equipment Sold
Value as % of historical cost in 5 years
Price when sold in 5 years
Marginal Tax Bracket
RRR
Sales
108,000
127,000
115,000
98,000
84,000
$
$
$
$
$
37,260,000.00
43,815,000.00
39,675,000.00
33,810,000.00
28,980,000.00
OCF
$ 8,696,845.00
$ 10,999,945.00
$ 9,500,445.00
$ 7,771,945.00
$ 6,393,365.00
7
1,500,000.00
0.15
$ 1,350,000.00
$
225.00
$
345.00
$ 23,000,000.00
MACRS
7-Year
5
20%
$ 4,600,000.00
0.35
0.18
MACRS Depreciation Schedule

Years
7-Year
1
2
3
4
5
6
7
8
0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
Total
Depr Ex
$ 3,286,700.00
$ 5,632,700.00
$ 4,022,700.00
$ 2,872,700.00
$ 2,053,900.00
$ 2,051,600.00
$ 2,053,900.00
$ 1,025,800.00
$ 23,000,000.00
NWC Schedule
Years
0
1
2
3
4
5
NWC needed
$ 1,500,000.00
$ 2,483,250.00
$ 1,862,250.00
$
982,500.00
$
258,000.00
Change in NWC
$ 1,500,000.00
$
983,250.00
$
(621,000.00)
$
(879,750.00)
$
(724,500.00)
$
(258,000.00)
$ (1,500,000.00)
End Book Value

$ 19,713,300.00
$ 14,080,600.00
$ 10,057,900.00
$ 7,185,200.00
$ 5,131,300.00
$ 3,079,700.00
$ 1,025,800.00
$
-
NWC
Cap Spending
Total Cash
$ (1,500,000.00) $ (23,000,000.00)
-24500000
$ (983,250.00)
7713595
$
621,000.00
11620945
$
879,750.00
10380195
$
724,500.00
8496445
$
258,000.00 $ 4,785,955.00
11437320
NPV
IRR
$6,082,363.61
28.12%
Price When sold Loss

Tax Benefit
Total Cash In
$ 4,600,000.00 $
(531,300.00)
185955 $ 4,785,955.00

Patterns of Cash Flows and NPV Analysis

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Patterns of Cash Flows and NPV Analysis

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Patterns of Cash Flows

==>> Bigger CF early, slope less steep

Also: Larger Discount Rate, NPV Smaller