Question

One company wants to start a new project At first, company put 5.000.000 EUR The net working capital requirements are equal to 15% of the annual sales at the beginning of each year The selling price of the product is 20,000 per unit for first year and the variable costs for the first year are 15,000 per unit and fixed costs for first year 1.000.000 EUR million After first year, price, variable and fixed costs will increase with inflation rate We also know that a)inflation rate is 2% and project's life is 4 years. b) Depreciations rates per year 15%,18%,11% and 14%. After 4 years the market value of the equipment will cost 420.000€ and the cost of capital is 10%

Tax rate is 20% and the estimated sales per year 1000 units.

How can we compute NPP,IRR and payback?

Answer 1

	0	1	2	3	4
Sales [1000 units*$20000+inflation of 2% from 2nd year]		20000000	20400000	20808000	21224160
Variable cost [15000 per unit + inflation of 2% from 2nd year]		15000000	15300000	15606000	15918120
Fixed costs [1000000 in the first year + inflation of 2%]		1000000	1020000	1040400	1061208
Depreciation		750000	900000	550000	700000	2900000
EBIT		3250000	3180000	3611600	3544832
Tax at 20%		650000	636000	722320	708966
NOPAT		2600000	2544000	2889280	2835866
Add: Depreciation		750000	900000	550000	700000
OCF		3350000	3444000	3439280	3535866
Capital expenditure	5000000
After tax salvage value [see note at the end]					756000
Change in NWC	3000000	60000	61200	62424	-3183624
Annual after tax project cash flows	-8000000	3290000	3382800	3376856	7475490
After tax salvage value:
Salvage value		420000
Book value = 5000000-2900000 =	2100000
Loss on sale = 2100000-420000 =	1680000
Tax shield on loss at 20%		336000
After tax salvage value		756000
NPV:
After tax project cash flows	-8000000	3290000	3382800	3376856	7475490
PVIF at 10%	1	0.90909	0.82645	0.75131	0.68301
PV at 10%	-8000000	2990909	2795702	2537082	5105860
NPV	5429553
IRR:
IRR is that discount rate for which NPV = 0. This has to be found out by trial and error to get 0 NPV.
Discounting with 30%						NPV
PVIF at 35%	1	0.74074	0.54870	0.40644	0.30107
PV at 35%	-8000000	2437037	1856132	1372496	2250632	-83702
PVIF at 34%	1	0.74627	0.55692	0.41561	0.31016
PV at 34%	-8000000	2455224	1883939	1403454	2318571	61188
IRR = 34+61188/(83702+61188) =	34.42%
PAYBACK:
Cumulative Cash Flows	-8000000	-4710000	-1327200	2049656	9525146
Payback period = 2+1327200/3376856 =	2.39	Years