ANALYSIS OF

PROJECT CASH
FLOWS
New Project

Q3: Down Under Boomerang, Inc is considering a new three-year

expansion project that requires an initial investment of $1,650,000.
The fixed asset will be depreciated on straight line to zero over three
year life, after which it will be worthless. The project is estimated to
generate $1,240,000 in annual sales, with costs of $485,000. The tax
rate is 35% and the required rate of return is 15%. Compute the
NPV of the project.

Q4: In the previous problem, suppose the project requires an initial

investment in NWC of $285,000 and the fixed asset will have a
market value of $225,000 at the end of the project. Compute the
new NPV.
 0 1 2 3

Initial Inv -1,650,000.00

Sales 1,240,000.00 1,240,000.00 1,240,000.00

Costs 485,000.00 485,000.00 485,000.00

Dep 550,000.00 550,000.00 550,000.00

PBT 205,000.00 205,000.00 205,000.00

Less: Tax 71,750.00 71,750.00 71,750.00

Add: Dep 550,000.00 550,000.00 550,000.00

OCF 683,250.00 683,250.00 683,250.00

Add: Net salvage Value 0 0 0

Net Annual CashFlow -1,650,000.00 683,250.00 683,250.00 683,250.00

PV of cash flows -1650000.00 610044.64 544682.72 486323.85

NPV -8948.79
 0 1 2 3
Initial Inv -1,650,000.00
Sales 1,240,000.00 1,240,000.00 1,240,000.00
Costs 485,000.00 485,000.00 485,000.00
Dep 550,000.00 550,000.00 550,000.00
EBIT 205,000.00 205,000.00 205,000.00
Less: Tax 71,750.00 71,750.00 71,750.00
Add: Dep 550,000.00 550,000.00 550,000.00
OCF 683,250.00 683,250.00 683,250.00
Add: Net salvage Value 0 0 146,250.00
CashFlow -1,650,000.00 683,250.00 683,250.00 829,500.00
Working capital -285,000.00
Release of working capital 285,000.00
Net Annual CashFlow -1,935,000.00 683,250.00 683,250.00 1,114,500.00
PV of cash flows -1935000.00 610044.64 544682.72 793279.09
NPV 13006.45
Q9_Ross

HP is considering a new project that complements its existing

business. The machine required for the project costs $3.9 million. The
marketing department predicts that sales related to the project will be
$2.35 Million per year for the next four years, after which the market
will cease to exist. The machine will be depreciated down to zero over
its four year economic life using SLM. Cost of goods sold and
operating expenses related to the project are predicted to be 25 % of
sales. HP also need to add net working capital of $150,000
immediately. The additional net working capital will be recovered in
full at the end of the projects life. The corporate tax is 35 percent. The
required rate of return for HP is 13%. Should HP proceed with the
project?
 0 1 2 3 4
Initial Inv -3,900,000.00
Sales 2,350,000.00 2,350,000.00 2,350,000.00 2,350,000.00
Less: COGS (25% of
sales) 587,500.00 587,500.00 587,500.00 587,500.00
Less: Dep 975,000.00 975,000.00 975,000.00 975,000.00
EBT 787,500.00 787,500.00 787,500.00 787,500.00
Less: Tax 275,625.00 275,625.00 275,625.00 275,625.00
Add: Dep 975,000.00 975,000.00 975,000.00 975,000.00
OCF 1,486,875.00 1,486,875.00 1,486,875.00 1,486,875.00
Add: Net salvage Value 0.00
Working capital -150,000.00
Release of working capital 150,000.00
Net Annual CashFlow -4,050,000.00 1,486,875.00 1,486,875.00 1,486,875.00 1,636,875.00
PV of cash flows -4,050,000.00 1315818.584 1164441.225 1030478.96 1003926.092
NPV 464,664.86
 0 1 2 3 4 5 6
Incremental Sales
Incremental expense
Incremental Depreciation
Incremental PBT
Incremental Tax

Incremental PAT
Add: Depreciation
:NET SALVAGE VALUE

PAT + Depreciation+NSV = Cash

Flow
Replacement Project

Q6_ Your firm is contemplating the purchase of a new $530,000

computer based order entry system. The system will be
depreciated SLM to zero over its five-year life. It will be worth
$50,000 at the end of that time. You will save $186,000 before
taxes per year in order processing cost, and you will be able to
reduce working capital by $85,000 (this is one time reduction). If
the tax rate is 35%, what is the IRR for this project?
 0 1 2 3 4 5

Initial investment -530,000.00

Incremental
Savings 186,000.00 186,000.00 186,000.00 186,000.00 186,000.00
Less: Incremental - -
Dep -106,000.00 -106,000.00 -106,000.00 106,000.00 106,000.00

PBT 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00

Lesss: Tax 28,000.00 28,000.00 28,000.00 28,000.00 28,000.00

PAT 52,000.00 52,000.00 52,000.00 52,000.00 52,000.00

Add: Dep 106,000.00 106,000.00 106,000.00 106,000.00 106,000.00

Change WC 85000 -85,000.00

Add: NSV 32,500.00

Net Annual cash

Flow -445,000.00 158,000.00 158,000.00 158,000.00 158,000.00 105,500.00

IRR 20.68%
 Q20
Rightprice Investors Inc. is considering the purchase of $415,000
computer with an economic life of five years. The computer will be
fully depreciated over five years using SLM. The market value of
the computer will be $50,000 in five years. The computer will
replace five office employees whose combined annual salaries are
$120,000. The machine will also immediately lower the firm’s
required net working capital by $80,000. This amount of NWC will
need to be replaced once the machine is sold. The corporate tax rate
is 34% and the discount rate is 9%. Is it worthwhile to buy the
computer?
 0 1 2 3 4 5
Investment -415,000.00
Reduction in salary 120,000.00 120,000.00 120,000.00 120,000.00 120,000.00
Less: Additional
Depreciation 83,000.00 83,000.00 83,000.00 83,000.00 83,000.00
Benefits before tax 37,000.00 37,000.00 37,000.00 37,000.00 37,000.00
Tax 12,580.00 12,580.00 12,580.00 12,580.00 12,580.00
After Tax benefits 24,420.00 24,420.00 24,420.00 24,420.00 24,420.00
Add: dep 83,000.00 83,000.00 83,000.00 83,000.00 83,000.00
Cashflows 107,420.00 107,420.00 107,420.00 107,420.00 107,420.00
Reduction in working
capital 80,000.00
Net salvage value 33,000.00
Working capital
required -80,000.00

Net Annual cashflows -335,000.00 107,420.00 107,420.00 107,420.00 107,420.00 60,420.00

PV -335,000.00 98,550.46 90,413.26 82,947.95 76,099.04 39,268.85
NPV 52,279.56
 Q21
A firm is considering an investment in a new machine with a price
of $15.6mn to replace its existing machine. The current machine has
a book value of $5.4mn and a market value of $4.1mn. The new
machine is expected to have a four-year life, and the old machine
has four years left in which it can be used. If the firm replaces the
old machine with the new machine, it expects to save $6.3mn in
operating costs each year over the next four years. Both machines
will have no salvage value in four years. If the firm purchases the
new machine, it will also need an investment of $250,000 in
working capital. The required rate of return on the investment is
10% and the tax rate is 39%.

What are the NPV and IRR of the decision to replace the old
machine?
 0 1 2 3 4
Invest (new) -15,600,000.00
Savings before tax 6,300,000.00 6,300,000.00 6,300,000.00 6,300,000.00
Depreciation(New) 3,900,000.00 3,900,000.00 3,900,000.00 3,900,000.00
Depreciation(Old) 1,350,000.00 1,350,000.00 1,350,000.00 1,350,000.00
Incremental Dep 2,550,000.00 2,550,000.00 2,550,000.00 2,550,000.00

Incremental Benefits 3,750,000.00 3,750,000.00 3,750,000.00 3,750,000.00

Tax 1,462,500.00 1,462,500.00 1,462,500.00 1,462,500.00
Benefits after Tax 2,287,500.00 2,287,500.00 2,287,500.00 2,287,500.00
Add: Inc Dep 2,550,000.00 2,550,000.00 2,550,000.00 2,550,000.00
OCF 4,837,500.00 4,837,500.00 4,837,500.00 4,837,500.00

Sale of Old(salvage Value) 4,607,000.00

Working capital -250,000.00
Return of WC 250,000.00
Net Annual Cashflows -11,243,000.00 4,837,500.00 4,837,500.00 4,837,500.00 5,087,500.00
PV -11,243,000.00 4397727.27 3997933.88 3634485.35 3474830.95
NPV 4,261,977.46
IRR 26.40%
 Q10
Replacement Decision: Unequal Project Life

You are evaluating two different silicon wafer milling machines.

Machine A costs $245,000, has a three year life and has pre-tax
operating costs of $39,000 per year. Machine B costs $315,000, has
a 5-year life and has pre-tax operating costs of $48,000 per year. For
both machines we use SLM for depreciation to zero over the
project’s life and assume salvage value of $20,000. If the tax rate is
35% and discount rate is 9%, compute Equivalent annual cost for
both the machines.
 0 1 2 3
Initial cost -245000.00
Operating costs -39000.00 -39000.00 -39000.00
Less: Deprecation 81666.67 81666.67 81666.67
- - -
Total costs 120666.67 120666.67120666.67
tax (benefit) -42233.33 -42233.33 -42233.33
Post tax cost -78433.33 -78433.33 -78433.33
Add: dep 81666.67 81666.67 81666.67
OCF 3233.33 3233.33 3233.33
NSV 13000.00
Cashflows -245000.00 3233.33 3233.33 16233.33
PV -245000.00 2966.36 2721.43 12535.11
NPV -226777.10
Eqvivalent annual cost
(Annuity) (-) -89589.37
 0 1 2 3 4 5

Initial cost -315000.00

Operating costs -48000.00 -48000.00 -48000.00 -48000.00 -48000.00

Less: Deprecation 63000.00 63000.00 63000.00 63000.00 63000.00

- - - - -
Total costs 111000.00 111000.00 111000.00 111000.00 111000.00

tax (benefit) -38850.00 -38850.00 -38850.00 -38850.00 -38850.00

Post tax cost -72150.00 -72150.00 -72150.00 -72150.00 -72150.00

Add: dep 63000.00 63000.00 63000.00 63000.00 63000.00

OCF -9150.00 -9150.00 -9150.00 -9150.00 -9150.00

NSV 13000.00

Cashflows -315000.00 -9150.00 -9150.00 -9150.00 -9150.00 3850.00

-315000.00 -8394.50 -7701.37 -7065.48 -6482.09 2502.24

NPV -342141.20

Eqvivalent annual cost

(Annuity) (-) -87961.92