Homework Answers
Best case
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |||
| Cost of new machine | -2070000 | ||||||||||
| =Initial Investment outlay | -2070000 | ||||||||||
| 100.00% | |||||||||||
| Unit sales | 102740 | 102740 | 102740 | 102740 | 102740 | 102740 | 102740 | ||||
| Profits | =no. of units sold * (sales price - variable cost) | 2171718.12 | 2171718.12 | 2171718.12 | 2171718.1 | 2171718.1 | 2171718.1 | 2171718.12 | |||
| Fixed cost | -768600 | -768600 | -768600 | -768600 | -768600 | -768600 | -768600 | ||||
| -Depreciation | Cost of equipment/no. of years | -295714.286 | -295714.286 | -295714.286 | -295714.3 | -295714.3 | -295714.3 | -295714.286 | 0 | =Salvage Value | |
| =Pretax cash flows | 1107403.834 | 1107403.834 | 1107403.834 | 1107403.8 | 1107403.8 | 1107403.8 | 1107403.834 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | 852700.9524 | 852700.9524 | 852700.9524 | 852700.95 | 852700.95 | 852700.95 | 852700.9524 | |||
| +Depreciation | 295714.2857 | 295714.2857 | 295714.2857 | 295714.29 | 295714.29 | 295714.29 | 295714.2857 | ||||
| =after tax operating cash flow | 1148415.238 | 1148415.238 | 1148415.238 | 1148415.2 | 1148415.2 | 1148415.2 | 1148415.238 | ||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||||||
| =Terminal year after tax cash flows | 0 | ||||||||||
| Total Cash flow for the period | -2070000 | 1148415.238 | 1148415.238 | 1148415.238 | 1148415.2 | 1148415.2 | 1148415.2 | 1148415.238 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.12 | 1.2544 | 1.404928 | 1.5735194 | 1.7623417 | 1.9738227 | 2.210681407 | ||
| Discounted CF= | Cashflow/discount factor | -2070000 | 1025370.748 | 915509.5967 | 817419.2828 | 729838.65 | 651641.65 | 581822.9 | 519484.7318 | ||
| NPV= | Sum of discounted CF= | 3171087.55 | |||||||||
Worst case
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |||
| Cost of new machine | -2070000 | ||||||||||
| =Initial Investment outlay | -2070000 | ||||||||||
| 100.00% | |||||||||||
| Unit sales | 84060 | 84060 | 84060 | 84060 | 84060 | 84060 | 84060 | ||||
| Profits | =no. of units sold * (sales price - variable cost) | 724765.32 | 724765.32 | 724765.32 | 724765.32 | 724765.32 | 724765.32 | 724765.32 | |||
| Fixed cost | -939400 | -939400 | -939400 | -939400 | -939400 | -939400 | -939400 | ||||
| -Depreciation | Cost of equipment/no. of years | -295714.286 | -295714.286 | -295714.286 | -295714.3 | -295714.3 | -295714.3 | -295714.286 | 0 | =Salvage Value | |
| =Pretax cash flows | -510348.966 | -510348.966 | -510348.966 | -510349 | -510349 | -510349 | -510348.966 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | -392968.704 | -392968.704 | -392968.704 | -392968.7 | -392968.7 | -392968.7 | -392968.704 | |||
| +Depreciation | 295714.2857 | 295714.2857 | 295714.2857 | 295714.29 | 295714.29 | 295714.29 | 295714.2857 | ||||
| =after tax operating cash flow | -97254.4179 | -97254.4179 | -97254.4179 | -97254.42 | -97254.42 | -97254.42 | -97254.4179 | ||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||||||
| =Terminal year after tax cash flows | 0 | ||||||||||
| Total Cash flow for the period | -2070000 | -97254.4179 | -97254.4179 | -97254.4179 | -97254.42 | -97254.42 | -97254.42 | -97254.4179 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.12 | 1.2544 | 1.404928 | 1.5735194 | 1.7623417 | 1.9738227 | 2.210681407 | ||
| Discounted CF= | Cashflow/discount factor | -2070000 | -86834.3017 | -77530.6265 | -69223.7737 | -61806.94 | -55184.77 | -49272.11 | -43992.9596 | ||
| NPV= | Sum of discounted CF= | -2513845.49 | |||||||||
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