Cost Soufflé maker $8,600 Discount rate

Economic life 5.00 Tax rate

The machine will produce : 1100 per year
Each costing $2.15
Priced at $5.95

Tax shield approach (OCF) $3,663.40

NPV $3,976.75 $3,976.75 $3,976.75
14%
21%
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($32,400)
Sales revenue $14,900 $16,300 $17,800 $13,700
Operating costs $3,200 $3,400 $4,500 $3,100
Depreciation $8,100 $8,100 $8,100 $8,100
EBIT $3,600 $4,800 $5,200 $2,500
Tax $792 $1,056 $1,144 $550
Net Income $2,808 $3,744 $4,056 $1,950
OCF $10,908 $11,844 $12,156 $10,050
NWC ($350) ($220) ($250) ($150) $970
NET CFO $10,688 $11,594 $12,006 $11,020
NPV $1,584.57
Tax rate 22%
Discount rate 12%
 Year 0 Year 1 Year 2 Year 3
Investment ($2,180,000)
Sales revenue $1,645,000 $1,645,000 $1,645,000
Operating costs $610,000 $610,000 $610,000
Depreciation $726,667 $726,667 $726,667
OCF $970,250.00 $970,250 $970,250 $1,362,450
NWC ($250,000) $250,000
Capital Spending $180,000
MACRS $726,594 $969,010 $322,858
Net Cash Flow $970,234.74 $1,021,142.10 $1,311,573.16
Net Cash Flow $1,275,450 $817,650 $1,209,850
NPV_3 $150,376.79
NPV_4 $179,537.00
NPV_5 $183,881.12
NPV_6 $221,767.55
Book value in 3 years $161,538
Aftertax salvage value $176,122.98
Aftertax salvage value $142,200
Tax rate 21% 0.3333 0.4445 0.1481
Required return 12%
 Recovery Period Class
Year 3 Years 5 Years 7 Years 10 Years 15 Years 20 Years
1 0.3333 0.2000 0.1429 0.1000 0.0500 0.0375
2 0.4445 0.3200 0.2449 0.1800 0.0950 0.0722
3 0.1481 0.1920 0.1749 0.1440 0.0855 0.0668
4 0.0741 0.1152 0.1249 0.1152 0.0770 0.0618
5 0.1152 0.0893 0.0922 0.0693 0.0571
6 0.0576 0.0892 0.0737 0.0623 0.0529
7 0.0893 0.0655 0.0590 0.0489
8 0.0446 0.0655 0.0590 0.0452
9 0.0656 0.0591 0.0446
10 0.0655 0.0590 0.0446
11 0.0328 0.0591 0.0446
12 0.0590 0.0446
13 0.0591 0.0446
14 0.0590 0.0446
15 0.0591 0.0446
16 0.0295 0.0446
17 0.0446
18 0.0446
19 0.0446
20 0.0446
21 0.0223
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($535,000)
Save before taxes per year $165,000 $165,000 $165,000 $165,000
Deprectiation $107,000 $107,000 $107,000 $107,000
OCF ($475,000) $151,080 $151,080 $151,080 $151,080
NWC $60,000
Capital Spending

Net salvage value $22,800

IRR 16.18%
Year 5 Tax rate 24%

$165,000
$107,000
$113,880

$30,000
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($385,000)
Operating costs $135,000 $135,000 $135,000 $135,000
Depreciation $77,000 $77,000 $77,000 $77,000
OCF $122,820 $122,820 $122,820 $122,820
OCF $187,500 $106,650 $106,650 $106,650
NWC ($35,000)
Capital Spending
NPV_8 $96,748.35
NPV_9 $108,951.33
Net salvage value $47,400
Year 5 Tax rate 21%
Discount Rate 10%
$135,000
$77,000
$205,220
$189,050

$60,000
Acquisition cost is: $5,700,000 Tax rate 21% 0.2000 0.3200 0.1920
Will be sold for : $1,800,000
Book Value _4 $984,960
Net salvage value $1,628,842
0.1152
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($3,700,000)
Sales revenue $2,650,000 $2,650,000 $2,650,000 $2,650,000
Operating costs $1,060,000 $1,060,000 $1,060,000 $1,060,000
Depreciation $925,000 $925,000 $925,000 $925,000
EBIT $665,000 $665,000 $665,000 $665,000
Tax $166,250 $166,250 $166,250 $166,250
NI $498,750 $498,750 $498,750 $498,750
OCF $1,423,750 $1,423,750 $1,423,750 $1,598,750
OCF $1,423,750 $1,423,750 $1,423,750 $1,598,750
NWC ($175,000)
Capital Spending
NPV $467,234.33
Tax rate 25%
Required return 13%
40%
The Techron I costs ($265,000) Salvage value $35,000
Pretax operating costs ($74,000) Tax rate 22%
The Techron II costs ($445,000) Discount Rate 10%
Pretax operating costs ($47,000) 3
5
Net salvage value $27,300
OCF_Techron_I ($38,287)
OCF_Techron_II ($17,080)
EAC_Techron_I ($136,599.36)
EAC_Techron_II ($129,998.21)
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($445,000)
Pretax cost savings $160,000 $160,000 $160,000 $160,000
inventory ($20,000) ($2,800) ($2,800) ($2,800) $28,400
Depreciation $89,000 $142,400 $85,440 $51,264
OCF $144,380.00 $156,128.00 $143,596.80 $136,078.08
OCF $222,700 $124,800 $124,800 $124,800
Net Cash Flow $141,580.00 $153,328.00 $140,796.80 $212,595.20
Net Cash Flow $219,900.00 $122,000.00 $122,000.00 $184,400.00
NPV $53,271.78
NPV $64,268.07
Book Value_4 $76,896
Net salvage value $48,117.12
Net salvage value $31,200
Tax rate 22% 0.2000 0.3200 0.1920 0.1152
Discount Rate 9%
Salvage value $40,000
The A costs ($295,000)
Pretax operating costs ($77,000) Tax rate 21%
The B costs ($355,000) Discount Rate 8%
Pretax operating costs ($83,000) 4.00
6.00

OCF_A ($45,343)
OCF_B ($53,145)
NPV_A ($445,180.11)
NPV_B ($600,682.94)
EAC_A ($134,409.14)
EAC_B ($129,936.96)
 Year 0 Year 1 Years 2-5 Tax rate 22%
($525,000) Required return 9%
Sales $348,000 $348,000 VC 35%
Variable costs $121,800 $121,800
Fixed costs $56,000 $56,000
Depreciation $525,000 $0
EBIT ($354,800)$170,200
Tax ($78,056) $37,444
Net income ($276,744)$132,756
NWC ($40,000) $40,000
Capital Spending $35,000
OCF $248,256 $132,756
NPV $101,078.23
Net salvage value $27,300
Machine A costs ($2,100,000) Machine A Machine B
VC_A $3,500,000 VC ($3,500,000) ($3,000,000)
Sales_A $10,000,000 FC ($315,000) ($355,000)
FC_A $315,000 Depreciation ($350,000) ($533,333)
Machine B costs ($4,800,000) EBT ($4,165,000) ($3,888,333)
VC_B $3,000,000 Tax ($999,600) ($933,200)
Sales_B $10,000,000 Net income ($3,165,400) ($2,955,133)
FC_B $355,000 Depreciation 350,000 533,333
OCF ($2,815,400) ($2,421,800)
NPV_A ($14,361,800.97)
NPV_B ($18,747,203.88)
EAC_A ($3,297,575.50)
EAC_B ($3,255,274.59)
Tax rate 24%
Required return 10%
35%
30%
6
9
Year Project A Project B Nominal interest rate 11%
0 ($53,000) ($59,000) Inflation rate 3%
1 $24,000 $27,000 Real interest rate 7.77%
2 $22,000 $26,000
3 $20,000 $25,000
NPV $4,193.23 $4,706.29
Aftertax revenue in Year 1 in real terms $4,563,040 Tax rate 21%
PVPG of revenues $97,085,957.45 Discount Rate 6%
Aftertax costs in year 1 in real terms $2,611,740 Q 3800000
PVPG of costs $51,210,588.24 P $1.52
Value of the firm $45,875,369.21 C $0.87
g_Q 1.3%
g_C 0.9%
 Nominal cash flows
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
-$750,000
Sales $320,000 $329,600 $339,488 $349,673 $360,163
Expenses $125,000 $128,750 $132,613 $136,591 $140,689
Depreciation $150,000 $150,000 $150,000 $150,000 $150,000
EBT $45,000 $50,850 $56,876 $63,082 $69,474
Tax $9,450 $10,679 $11,944 $13,247 $14,590
Net income $35,550 $40,172 $44,932 $49,835 $54,885
OCF $185,550 $190,172 $194,932 $199,835 $204,885
Capital spending $51,350
NWC -$20,000 $20,000
Total cash flow -$770,000 $185,550 $190,172 $194,932 $199,835 $276,235

Net salvage value $51,350

Inflation rate 3%
Tax rate 21%
Salvage value $65,000
PVPG $3,933,333.33 295000
0.035
0.04
Equipment costs ($135,000) Tax rate 23%
Operate costs ($15,700) Discount Rate 12%
Salvage value $19,500 3
OCF ($1,739.00)
NPV ($128,489.40)
EAC ($53,496.43)
Net salvage value $15,015
 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Tax rate
Investment ($425,000) Discount Rate
Saved salaries $95,000 $95,000 $95,000 $95,000 $95,000 Salvage value
Depreciation $85,000 $85,000 $85,000 $85,000 $85,000
OCF $92,800 $92,800 $92,800 $92,800 $92,800
NWC $40,000 ($40,000)
Capital Spending $27,300
Net Cash Flow ($385,000) $92,800 $92,800 $92,800 $92,800 $80,100
NPV ($32,294.49)
 22%
9%
$35,000
 Buy New machine
Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($10,090,000)
Pretax cost savings $4,400,000 $4,400,000 $4,400,000 $4,400,000
Depreciation $2,522,500 $2,522,500 $2,522,500 $2,522,500
Depreciation $1,572,500 $1,572,500 $1,572,500 $1,572,500
NWC ($250,000) $250,000
OCF ($10,340,000) $4,005,725 $4,005,725 $4,005,725 $4,255,725
OCF ($7,330,000) $3,806,225 $3,806,225 $3,806,225 $4,056,225
NPV $2,528,362.63
IRR 20.76%

Keep old machine:

Book value $3,800,000
Market value $2,800,000
Aftertax cost value $3,010,000

Depreciation $950,000
EBT -$950,000
Taxes -$199,500
Net income -$750,500
OCF $199,500 ($3,010,000) $199,500 $199,500

NPV -$2,377,611.84
IRR -51.51%

Sell old machine and Buy new Machine:

NPV $4,905,974.47
IRR 37.94%
Differential NPV $4,905,974.47
 Tax rate 21%
Required return 10%

$199,500
 Nominal Cash Flows
Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($780,000)
Operating revenues $595,000 $624,750 $655,988 $688,787
Production costs $355,000 $369,200 $383,968 $399,327
Depreciation $111,429 $111,429 $111,429 $111,429
OCF ($780,000) $209,142.86 $220,960.86 $233,477.68 $246,732.57
NPV $312,371.45

Real Cash Flows

Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($780,000)
Operating revenues $566,666.67 $566,666.67 $566,666.67 $566,666.67
Production costs $338,095.24 $334,875.28 $331,686.00 $328,527.08
Depreciation $106,122.45 $101,069.00 $96,256.19 $91,672.56
OCF ($780,000) $199,183.67 $200,418.01 $201,686.80 $202,987.50
NPV $312,371.45

PVAG of aftertax revenues $2,320,987.30

PVAG of aftertax costs $1,349,321.07
PV of depreciation tax shield $120,705.21
NPV $312,371.45
 NPER 7
Year 5 Year 6 Year 7 Inflation rate 5%
Tax rate 24%
$723,226 $759,388 $797,357 Real discount rate 7%
$415,300 $431,912 $449,188 GrowthRateProductionCosts 4%
$111,429 $111,429 $111,429 Nominal discount rate 12.35%
$260,766.94 $275,624.43 $291,351.03 Real cost increase -0.95%

Year 5 Year 6 Year 7

$566,666.67 $566,666.67 $566,666.67

$325,398.25 $322,299.22 $319,229.70
$87,307.20 $83,149.72 $79,190.21
$204,317.72 $205,675.19 $207,057.74
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($485,000)
Operating revenues $730,000.00 $788,400.00 $851,472.00 $919,589.76
Variable costs $340,000.00 $367,200.00 $396,576.00 $428,302.08
Fixed costs $150,000 $150,000 $150,000 $150,000
Depreciation $97,000 $97,000 $97,000 $97,000
OCF ($580,000) $209,970.00 $234,618.00 $261,237.84 $289,987.27
NWC ($95,000)
NPV $256,862.75

PV of revenues $2,611,525.04
PV of variable costs $1,216,326.73
PV of fixed costs $469,075.65
PV of depreciation $303,335.59
NPV $256,862.75
 Year 5 Tax rate 21%
Required return 18%
$993,156.94 Growth Rate 8%
$462,566.25 Quantity 10000
$150,000 P $73
$97,000 VC $34
$416,036.65 FC $150,000
$95,000 NPER 5
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($2,850,000)
Units for Sell 5200 5900 6500 4800
Operating revenues $2,262,000 $2,566,500 $2,827,500 $2,088,000
Variable costs $452,400 $513,300 $565,500 $417,600
Fixed costs $375,000 $375,000 $375,000 $375,000
Depreciation $949,905 $1,266,825 $422,085 $211,185
Depreciation $2,850,000 $0 $0 $0
OCF ($5,200,000) $1,327,967.10 $1,587,697.50 $1,564,718.70 $3,922,772.70
OCF ($5,200,000) $1,745,988.00 $1,308,996.00 $1,471,860.00 $3,876,312.00
NWC ($150,000) $150,000
Marketing Cost ($275,000) $0
Land ($2,200,000) $2,400,000
Capital Spending $315,900
NPV_28 $708,930.67
NPV_29 $767,745.56
Tax rate 22% 0.3333 0.4445 0.1481 0.0741
Required return 13%
FC $375,000
VC 20%
Salvage value $405,000
Price $435
Old machine :
The machine’s current salvage value is : $2,800,000 Now Tax rate
Current book value $1,600,000 Discount Rate
Maintenance costs $855,000 next five years NPER
Depreciation $320,000
Salvage value $140,000 At the end of five years
Cost Of Keep Old Machine $2,548,000
AfterTax Salvage value $110,600 At the end of five years

Maintenance costs $855,000

Depreciation $320,000
EBT ($1,175,000)
Tax ($246,750)
NI ($928,250)
OCF ($608,250)
NPV ($4,901,293.38) ($4,901,293.38)

Replacement machine :
Machine costs $4,500,000 Now
Maintenance costs $350,000 for five years
Salvage value $900,000 At the end of five years
Depreciation $900,000 for five years
AfterTax Salvage value $711,000 At the end of five years

Maintenance costs $350,000

Depreciation $900,000
EBT ($1,250,000)
Tax ($262,500)
NI ($987,500)
OCF ($87,500)
NPV ($4,365,467.48) ($4,365,467.48)

Sell old Machine and buy new Machine

Purchase new machine ($4,500,000)
Sell old machine 2,800,000
Taxes on old machine ($252,000)
Total ($1,952,000) ($1,952,000)

Maintenance cost ($505,000)

Depreciation 580,000
EBT ($75,000)
Taxes ($15,750)
Net income ($59,250)
 OCF $520,750

Sell machine $900,000 At the end of five years

Taxes ($189,000)
Lost sale of old ($140,000)
Taxes on lost sale of old 29,400
Total $600,400 $600,400

NPV $535,825.90 $535,825.90

Differential NPV $535,825.90

In five years, a replacement machine will cost $3,400,000

EAC_Replace ($1,093,360) Replace now
EAC_Keep ($1,227,561)
21%
8%
5
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($1,500,000)
Operating revenues $1,960,000 $2,018,800 $2,079,364.00 $2,141,744.92
Variable costs $760,000 $790,400 $822,016 $854,896.64
Fixed costs $450,000 $450,000 $450,000 $450,000
Depreciation $300,000 $300,000 $300,000 $300,000
OCF ($2,150,000) $655,500 $677,936.00 $700,804.92 $724,110.14
NWC ($650,000)
NPV $809,743.67

PV of revenues $7,644,667.90
PV of variable costs $3,018,022.10
PV of fixed costs $1,663,153.66
PV of depreciation $1,108,769.11
NPV $809,743.67
 Year 5 Tax rate 21%
Discount Rate 11%
$2,205,997.27 Grow Rate Sales Price 3%
$889,092.51 Grow Rate Production Cost 4%
$450,000 Price $49 per unit
$300,000 VC $19 per unit
$1,397,854.76 Quantity 40000 per unit
$650,000 FC $450,000
NPER 5
 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Investment ($14,800,000)
Operating revenues 29,110,000 34,440,000 42,230,000 38,950,000
26,240,000
Variable costs 20,235,000 23,940,000 29,355,000 27,075,000
18,240,000
Fixed costs $2,900,000 $2,900,000 $2,900,000 $2,900,000
$2,900,000
Depreciation $2,114,920 $3,624,520 $2,588,520 $1,848,520
$1,321,640
OCF $5,164,383 $6,765,149 $8,423,839 $7,478,439
$4,306,544
NWC ($2,300,000) ($799,500) ($1,168,500) $492,000 $1,906,500
$1,869,500
Capital Spending $3,031,795
Net Cash Flow ($17,100,000) $4,364,883 $5,596,649 $8,915,839 $9,384,939 $9,207,839
NPV $4,910,413.48
IRR 28.39%
Net salvage value $3,031,795

Tax rate 21%

Required return 18%
Salvage value $2,960,000
GrowthRateInNWC 15%
FC $2,900,000
VC $285
Price $410
Year Unit Sales 0.1429 0.2449 0.1749 0.1249 0.0893
1 71,000
2 84,000
3 103,000
4 95,000
5 64,000
Investement cost ($645,000)
NPER 5
NWC ($55,000)
TaxRate 21%
Discount rate 12% 0.3333 0.4445 0.1481 0.0741
Salvage value $50,000 $214,978.50 $286,702.50 $95,524.50 $47,794.50
AfterTaxSalvageValue $39,500 $188,714.33 $188,714.33 $188,714.33 $188,714.33
1.Step $162,584.39 right side Pretax cost savings necessary
2.Step $700,000 left side
3.Step $537,415.61 result
Result $537,415.61
 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Investment ($940,000)
Sales $3,630,000 $3,630,000 $3,630,000 $3,630,000 $3,630,000
Variable costs $2,357,300 $2,357,300 $2,357,300 $2,357,300 $2,357,300
Fixed costs $850,000 $850,000 $850,000 $850,000 $850,000
Depreciation $188,000 $188,000 $188,000 $188,000 $188,000
OCF ($1,030,000) $262,238.62 $262,238.62 $262,238.62 $262,238.62
OCF ($1,030,000) $373,413 $373,413 $373,413 $373,413 $522,663
NWC ($90,000) $90,000
Capital Spending $59,250
Bid Price $31.72
NPV (a) $400,758.75
QMin (b) 97,837
FCMax (c) $990,727.06
Net salvage value $59,250

Tax rate 21%

Required return 12%
Salvage value $75,000
Quantity 110000 units per year
NPER 5
FC $850,000
VC $21.43

a.
Price of unit $33
NPV $0.00

Steps
1
2
3
4
5
 Year 0 Year 1 Year 2 Year 3 Year 4
Investment ($3,400,000)
Sales
In addition to the contract 12,300 14,600 19,200 11,600
In Addition Sales $2,214,000 $2,628,000 $3,456,000 $2,088,000
Variable costs $1,045,500 $1,241,000 $1,632,000 $986,000
Variable costs 425,000 425,000 425,000 425,000
Fixed costs $595,000 $595,000 $595,000 $595,000
Depreciation $850,000 $850,000 $850,000 $850,000
OCF $899,745 $1,067,990 $1,404,480 $848,540
OCF ($3,795,000) $37,518.42 $37,518.42
NWC ($395,000) $395,000
Capital Spending $250,250
NPV of market sales $3,335,357.21 ($459,643) Positive factor
Bid Price $162.97 This price makes NPV = 100000$
NPV $100,000.00
Net salvage value $250,250

Tax rate 23%

Required return 10%
Salvage value $325,000
FC $595,000
VC $85
Price $180
Quantity 5000
NPER 4
 Steps
1
2
3
 Year 0 Year 1 Year 2 Year 3 Year 4
Old computer costs ($1,400,000)
New computer costs ($1,700,000)
Operating save costs New computer $315,000 $315,000 $315,000 $315,000
Old computer Sell now $450,000
Old computer Sell in two years $130,000 $843,000
New Computer Depreciation $340,000 $340,000 $340,000 $340,000
Old Computer Depreciation $281,000 $281,000 $281,000
OCF New Computer ($1,700,000) $320,500 $320,500 $320,500 $320,500
OCF Old Computer ($536,460) $61,820 $225,040
Capital Spending New Computer
Capital Spending Old Computer $163,220
NPV New Computer ($400,826.52)
EAC New Computer ($111,193.18)
NPV Old Computer ($301,863.06)
EAC Old Computer ($178,611.80)

b,
t New computer Old computer Difference
0 ($1,700,000) ($536,460) ($1,163,540)
1 $320,500 61,820 $258,680
2 $320,500 225,040 $95,460
3 $320,500 0 $320,500
4 $320,500 0 $320,500
5 $574,000 0 $574,000

NPV ($98,963.46) ($98,963.46)

Year 5 Tax rate 22%
Discount Rate 12%
NPER 5
$315,000 SalvageValue $325,000 The new computer after five years

$340,000

$574,000

$253,500
 Product A Product B NPER 15
Costs-modifications $135,000 $175,000 TaxRate 21%
Costs- for equipment $360,000 $275,000 Required rate 12% on each alternative
Revenue $295,000 $310,000 Rent $80,000 Annually
Pre-Tax Costs $125,000 $145,000
Costs-15 $80,000 $95,000
Own $1,750,000

Continue to rent:
Rent $80,000
Taxes 16,800
Net income $63,200
NPV $430,446.64

Product A:
Initial cash outlay:
Building modifications ($135,000)
Equipment ($360,000)
Total cash flow ($495,000)

Years 1-14 Year 15

Revenue $295,000 $295,000
Expenditures $125,000 $125,000
Depreciation $33,000 $33,000
Restoration cost $80,000
EBT $137,000 $57,000
Tax $28,770 $11,970
NI $108,230 $45,030
OCF $141,230 $78,030
NPV $455,351.99

Product B:
Initial cash outlay:
Building modifications ($175,000)
Equipment ($275,000)
Total cash flow ($450,000)

Years 1-14 Year 15

Revenue $310,000 $310,000
Expenditures $145,000 $145,000
Depreciation $30,000 $30,000
Restoration cost $95,000
EBT $135,000 $40,000
Tax $28,350 $8,400
NI $106,650 $31,600
OCF $136,650 $61,600
NPV $466,993.28

NPV [A-Rent] $24,905

NPV [B-Rent] $36,546.64
 In nominal terms In real terms PVPG
Revenues $385,000 Revenues $370,905.59 $12,363,519.59
Labor costs $197,000 Labor costs $189,788.05 $4,744,701.35
Other costs $77,000 Other costs $74,181.12 $1,236,351.96
Lease machinery $175,000 per year Lease machinery $168,593.45 $1,561,050.45

NPV $3,760,704.35
Revenues will increase by 4% per year in real terms
Labor costs will increase by 3% per year in real terms
Other costs will increase by 1% per year in real terms
InflationRate 3.8% per year
The required rate 7% in real terms
Tax rate 22%
 0 1 2 3
Investment ($125,000,000)
Operating revenues $65,250,000 $69,600,000 $73,950,000
Real labor cost each year $16.25 $16.58 $16.91
Labor costs $20,312,500 $24,033,750 $26,374,140
Real energy cost each year $4.35 $4.48 $4.61
Energy costs $891,750 $1,030,515 $1,199,878
Depreciation $31,250,000 $31,250,000 $31,250,000
Real Depreciation $29,761,905 $28,344,671 $26,994,925
OCF ($125,000,000) $41,046,142.50 $41,135,611.60 $42,305,960.10
NPV $23,300,865.70

Discount Rate 4% in real terms

Tax Rate 21%
Price $435 per unit
Labor costs $16.25 per hour
Labor costs will increase 2% per year in real terms
Energy costs $4.35 per physical unit
Energy costs will increase 3% in real terms
The inflation rate 5%
NPER 4
 4 Year 1 Year 2 Year 3
Physical production, in units 150,000 160,000 170,000
$63,075,000 Labor input, in hours 1,250,000 1,450,000 1,560,000
$17.24 Energy input, physical units 205,000 230,000 260,000
$19,831,325
$4.75
$926,906
$31,250,000
$25,709,452
$38,829,233.15
 Year 4
145,000
1,150,000
195,000
 Headache only: Price
1 2 3 The headache-only
Sales $34,375,000 $34,375,000 $34,375,000 The headache and arthritis
Production costs 18,700,000 18,700,000 18,700,000 Costs of production
Depreciation 9,385,113 9,111,760 8,846,369 Costs of production
EBT $6,289,887 $6,563,240 $6,828,631 Equipment costing
Tax 1,383,775 1,443,913 1,502,299 Equipment costing
Net income $4,906,112 $5,119,327 $5,326,332 Salvage Value
OCF $14,291,225 $14,231,087 $14,172,701 NPER
TaxRate
NPV $9,761,618.31 Real discount rate
Inflation rate
Net SalavgeValue $780,000

Headache and arthritis:

1 2 3
Sales $44,375,000 $44,375,000 $44,375,000
Production costs 29,465,000 29,465,000 29,465,000
Depreciation 11,003,236 10,682,754 10,371,605
EBT $3,906,764 $4,227,246 $4,538,395
Tax 859,488 929,994 998,447
Net income $3,047,276 $3,297,252 $3,539,948
OCF $14,050,512 $13,980,006 $13,911,553

NPV $4,752,833.38
 $6.25 per package in real terms for BOTH
5500000 packages a year
7100000 packages a year
$3.40 for the headache-only brand in real terms
$4.15 for the headache and arthritis pill in real terms
$29,000,000 The headache-only
$34,000,000 The headache and arthritis
$1,000,000 The headache and arthritis
3
22%
5%
3%
 Year 1 Year 2 Year 3 Year 4 Year 5
New $11,400,000 $13,500,000 $16,500,000 $14,700,000 $13,800,000
Lost sales ($1,144,000) ($1,144,000) ($1,144,000) ($1,144,000) ($1,144,000)
Total $10,256,000 $12,356,000 $15,356,000 $13,556,000 $12,656,000

Depreciation $2,429,300.00 $4,163,300.00 $2,973,300.00 $2,123,300.00 $1,518,100.00

New table ($1,140,000)

Old table $114,400
Total ($1,025,600)

Book value $7,434,100 $7,434,100

Taxes on salvage $532,161

Sell equipment $4,900,000

Taxes 532,161
Salvage value $5,432,161

Year 1 Year 2 Year 3 Year 4 Year 5

New $4,788,000 $5,670,000 $6,930,000 $6,174,000 $5,796,000
Lost sales ($457,600) ($457,600) ($457,600) ($457,600) ($457,600)
Variable costs $4,330,400 $5,212,400 $6,472,400 $5,716,400 $5,338,400

Year 1 Year 2 Year 3 Year 4 Year 5

Sales $10,256,000 $12,356,000 $15,356,000 $13,556,000 $12,656,000
VC $4,330,400 $5,212,400 $6,472,400 $5,716,400 $5,338,400
Fixed costs $2,150,000 $2,150,000 $2,150,000 $2,150,000 $2,150,000
Dep. $0 $0 $2,973,300 $2,123,300 $1,518,100
EBT $3,775,600 $4,993,600 $3,760,300 $3,566,300 $3,649,500
Tax $792,876 $1,048,656 $789,663 $748,923 $766,395
NI $2,982,724 $3,944,944 $2,970,637 $2,817,377 $2,883,105
OCF $2,982,724 $3,944,944 $5,943,937 $4,940,677 $4,401,205

Year 1 Year 2 Year 3 Year 4 Year 5

Beginning $1,025,600 $1,235,600 $1,535,600 $1,355,600 $1,265,600
Ending 1,235,600 1,535,600 1,355,600 1,265,600 0
Old table ($114,400)
Change -$210,000 -$300,000 $180,000 $90,000 $1,265,600

Year 1 Year 2 Year 3 Year 4 Year 5

OCF $2,982,724 $3,944,944 $5,943,937 $4,940,677 $4,401,205
Equipment 0 ($17,000,000) 0 0 5,432,161
Inventory -$210,000 -$300,000 $180,000 $90,000 $1,265,600
Total $2,772,724 -$13,355,056 $6,123,937 $5,030,677 $11,098,966

NPV $5,011,415.33
Price $6,000 a new mahogany dining room table set
VC 42% of sales
FC $2,150,000 per year
IC 10% of sales produced and stock-piled in the year prior to sales
The new table 260 will cause a loss of tables per year Time Quantity
Old price tables $4,400 per table 1 1900
Old VC 40% of sales 2 2250
Old IC 10% of sales 3 2750
NPER 5 4 2450
Old NPER will continue indefinitely 5 2300
Equipment cost ($17,000,000) today
Salvage Value $3,000,000 In five years if purchased today
Salvage Value $4,900,000 In five years if purchased in two years 0.1429
TaxRate 21% 0.2449
Required return 11% 0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
 Year 1 Year 2 Year 3 Year 4 Time
Contract $44,500,000 $44,500,000 $44,500,000 $44,500,000 1
Spot $12,320,000 $16,940,000 $20,020,000 $9,240,000 2
Total $56,820,000 $61,440,000 $64,520,000 $53,740,000 3
4
Equipment ($105,000,000)
Land ($6,700,000)
NWC ($2,841,000)
Total ($114,541,000)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Sales $56,820,000 $61,440,000 $64,520,000 $53,740,000
VC 19,800,000 21,600,000 22,800,000 18,600,000
FC 4,100,000 4,100,000 4,100,000 4,100,000 $2,400,000
Dep. 15,004,500 25,714,500 18,364,500 13,114,500
EBT $17,915,500 $10,025,500 $19,255,500 $17,925,500 -$2,400,000
Tax 4,478,875 2,506,375 4,813,875 4,481,375 -600,000 -1,750,000
NI $13,436,625 $7,519,125 $14,441,625 $13,444,125 -$1,800,000 $1,750,000
+ Dep. 15,004,500 25,714,500 18,364,500 13,114,500
OCF $28,441,125 $33,233,625 $32,806,125 $26,558,625 -$1,800,000 $1,750,000

Year 1 Year 2 Year 3 Year 4

Beg. NWC $2,841,000 $3,072,000 $3,226,000 $2,687,000
End NWC 3,072,000 3,226,000 2,687,000
∆NWC -231,000 -154,000 539,000 2,687,000

Book value of equipment 32,802,000

Taxes on sale of equipment -7,549,500
Aftertax salvage value 49,450,500

Time CFO
0 -114,541,000
1 28,210,125
2 33,079,625
3 33,345,125
4 78,696,125
5 -$1,800,000
6 $1,750,000

Payback period 3.25 years

Profitability index 1.0928
NPV $10,629,933.72
IRR 15.65%
 Q Discount Rate 12%
660,000 Tax Rate 25%
720,000 Quanity 500000 The contract calls for the delivery per year
760,000 Price $89 under contract
620,000 Price $77 on Spot market
NWC 5% The required NWC percentage Year 1 from Sales
VC $30 per ton
FC $4,100,000
The cost of reclamation $2,400,000
Charitable expense $7,000,000 This will occur in Year 6
Salvage Value 60% of its initial purchase price in four years

0.1429 0.2449 0.1749 0.1249

Borrow Tax (Tax Credit on Interest)

The research and development costs ($10,000,000) Sunk costs
NPER 4
Test marketing ($5,000,000) Sunk costs

Initially invest ($185,000,000) in production equipment

Salvage Value $75,000,000 at the end of four years

Marketing and general administration costs ($53,000,000) the first year

TaxRate 23%

Inflation Rate 3.25%

Discount rate 13.4%

Data on Market OEM:

Automotive industry analysts expect 8500000 To produce new cars this year
Production to grow 2.5% per year thereafter
Target OEM:
Goodweek Tires expects the SuperTread to capture 11% market share
Data on Market RM:
Industry analysts estimate that the replacement tire market
size 35000000 To produce new cars this year
Production to grow 2% per year thereafter
Target RM:
Goodweek Tires expects the SuperTread to capture 8% market share
NWC:
The immediate initial working capital requirement ($10,000,000)
NWC 15% of sales Thereafter requirement

0.1429
0.2449
0.1749
0.1249
0.0893
0.0892
0.0893
0.0446
 Market Price VC
OEM $43 $31 per tire
RM $64 $31 per tire

Growth
1% 1% will increase above the inflation rate
The nominal
growth
4.28% 4.28%

equirement
 The number of tires sold in the OEM market will be:
Year 1 Year 2 Year 3 Year 4
Automobiles sold 8,500,000 8,712,500 8,930,313 9,153,570
Tires for automobiles sold 34,000,000 34,850,000 35,721,250 36,614,281

SuperTread tires sold 3,740,000 3,833,500 3,929,338 4,027,571

The number of tires sold in the replacement market will be:

Year 1 Year 2 Year 3 Year 4
Total tires sold in market 35,000,000 35,700,000 36,414,000 37,142,280

SuperTread tires sold 2,800,000 2,856,000 2,913,120 2,971,382

So the price each year will be:

Year 1 Year 2 Year 3 Year 4
OEM $43.00 $44.84 $46.76 $48.76
Replacement $64.00 $66.74 $69.60 $72.58

The revenue each year will be:

Year 1 Year 2 Year 3 Year 4
OEM market $160,820,000 $171,899,794 $183,742,938 $196,402,023
Replacement market 179,200,000 190,611,725 202,750,165 215,661,600
Total 340,020,000 362,511,519 386,493,104 412,063,623

We will calculate the nominal cash flows

Year 1 Year 2 Year 3 Year 4
Revenue $340,020,000 $362,511,519 $386,493,104 $412,063,623
Variable costs 202,740,000 216,255,313 221,200,058 226,259,189
Mkt. and general costs 53,000,000 54,722,500 56,500,981 58,337,263
Depreciation 26,436,500 45,306,500 32,356,500 23,106,500
EBT $57,843,500 $46,227,206 $76,435,564 $104,360,671
Tax 11,810,960 9,492,026 16,014,680 21,313,545
Net income $39,541,040 $31,777,654 $53,614,365 $71,354,041
OCF $62,405,040 $70,961,654 $81,598,365 $91,338,041

The net working capital cash flows will be:

Year 1 Year 2 Year 3 Year 4
Beginning 10,000,000 51,003,000 54,376,728 57,973,966
Ending 51,003,000 54,376,728 57,973,966 0
NWC cash flow -41,003,000 -3,373,728 -3,597,238 57,973,966

Book value of equipment 57,794,000

Aftertax salvage value 71,042,620

Time CFO DCFO

0 ($195,000,000) ($195,000,000)
1 $21,402,040 $18,873,051
2 $67,587,926 $52,558,506
3 $78,001,127 $53,488,660
4 $220,354,627 $133,250,840
Payback period 3.36 years
Discounted cash flow 3.53 years
Profitability index 1.324
IRR 24.07%
NPV $63,171,056.75