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Program #1
| Stage 1: Depreciation (25% reducing balance) | Salvage Value: | $ 30,000.00 | ||||||
| Years | Initial Value | Depreciation | Residual Value | The salvage value is how much the firm believes they can sell the asset for once it reached the end of its’ economic life. By “end of its’ economic life”, this means it has been fully depreciated.
Depreciation is a non-case expense. These are monies that the government allows a compay to set aside tax-free, so that they will have cash available to assist in replacing the asset once it reaches the end of its’ economic life. |
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| 1 | $170,000.00 | $42,500.00 | $127,500.00 | |||||
| 2 | $127,500.00 | $31,875.00 | $95,625.00 | |||||
| 3 | $95,625.00 | $23,906.25 | $71,718.75 | |||||
| 4 | $71,718.75 | $17,929.69 | $53,789.06 | |||||
| 5 | $53,789.06 | $13,789.06 | $40,000.00 | |||||
| Operating Revenues | Inflationary Adjustment to Revenues: | 2.00% | ||||||
| Years | Volume | Price per Unit of Service | Operating Revenue | There are several ways to forecast future inflation. I normally use an inflationary adjustment between 2% and 3%, this is typically aligns with the 10 year Treasury rates. For the costs, in this scenario, I went a little more aggressive on the projected inflationary rate. Many finance folks will be a little more conservation when forecasting revenues (using a lower inflationary rate) and a bit more aggressive, yet realistic, when using an inflationary rate for costs. | ||||
| 1 | 3,000 | $130.00 | $390,000.00 | |||||
| 2 | 6,500 | $132.60 | $861,900.00 | |||||
| 3 | 9,200 | $135.25 | $1,244,318.40 | |||||
| 4 | 7,500 | $137.96 | $1,034,677.80 | |||||
| 5 | 4,000 | $140.72 | $562,864.72 | |||||
| Operating Costs | Inflationary Adjustment to Costs: | 10% | Operating revenue are the revenues generated from the sell of good and services by a firm. | |||||
| Years | Volume | Cost per Unit of Service | Operating Costs | |||||
| 1 | 3000 | $95.00 | $285,000.00 | Operating costs are those costs necessary to run the business. Operating costs include the cost of goods sold (COGS), which are costs directly related to the production of goods and services, but also includes other business expenses. | ||||
| 2 | 6500 | $104.50 | $679,250.00 | |||||
| 3 | 9200 | $114.95 | $1,057,540.00 | |||||
| 4 | 7500 | $126.45 | $948,337.50 | |||||
| 5 | 4000 | $139.09 | $556,358.00 | |||||
| Stage 2 | Revenues in Excess of Expenses | Corporate Tax Rate: | 28% | [Federal & State] | ||||
| Years | ||||||||
| 1 | 2 | 3 | 4 | 5 | ||||
| Operating Revenues | $390,000.00 | $861,900.00 | $1,244,318.40 | $1,034,677.80 | $562,864.72 | |||
| Operating Costs | $285,000.00 | $679,250.00 | $1,057,540.00 | $948,337.50 | $556,358.00 | |||
| Depreciation | $42,500.00 | $31,875.00 | $23,906.25 | $17,929.69 | $13,789.06 | |||
| Earnings Before Tax (EBT) | $62,500.00 | $150,775.00 | $162,872.15 | $68,410.61 | -$7,282.34 | |||
| Tax Rate (28%) | $17,500.00 | $42,217.00 | $45,604.20 | $19,154.97 | -$2,039.06 | |||
| Net Income | $45,000.00 | $108,558.00 | $117,267.95 | $49,255.64 | -$5,243.28 | |||
| Stage 3: Cash Flow Estimations | Net Working Capital = 15% of Revenues | |||||||
| Years | ||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | |||
| Net Working Capital (Current Assets) | $58,500.00 | $129,285.00 | $186,647.76 | $155,201.67 | $84,429.71 | $0.00 | ||
| Change in NWC | -$58,500.00 | -$70,785.00 | -$57,362.76 | $31,446.09 | $70,771.96 | $84,429.71 | ||
| Years | ||||||||
| Cash Flow from Operations | 0 | 1 | 2 | 3 | 4 | 5 | ||
| Net Income | $45,000.00 | $108,558.00 | $117,267.95 | $49,255.64 | -$5,243.28 | |||
| Depreciation | $42,500.00 | $31,875.00 | $23,906.25 | $17,929.69 | $13,789.06 | |||
| Net Cashflow from Operations | $87,500.00 | $140,433.00 | $141,174.20 | $67,185.33 | $8,545.78 | |||
| Years | ||||||||
| Cash Flow from Investments | 0 | 1 | 2 | 3 | 4 | 5 | ||
| Machine #1 | -$170,000.00 | $30,000.00 | ||||||
| Change in Net Cash Flow (NCF) | -$58,500.00 | -$70,785.00 | -$57,362.76 | $31,446.09 | $70,771.96 | $84,429.71 | ||
| Total NCF (Invest & Ops) | -$228,500.00 | $16,715.00 | $83,070.24 | $172,620.29 | $137,957.29 | $92,975.49 | ||
| Present Value (PV) | -$228,500.00 | $15,195.45 | $68,653.09 | $129,692.18 | $94,226.69 | $57,730.46 | ||
| Cumulative Discounted Cashflows | -$228,500.00 | -$213,304.55 | -$144,651.45 | -$14,959.28 | $79,267.41 | $136,997.87 | ||
| Stage 4: Capital Analyses | Discounting Cash Flows | |||||||
| Years | Cash Flows | Cash Flows discounted to today’s $$ | Cumulative Discounted CFs | |||||
| Discount Rate (r) = | 10% | 0 | -$228,500.00 | -$228,500.00 | -$228,500.00 | |||
| Weighted Average Cost of Capital = | 10% | 1 | $16,715.00 | $15,195.45 | -$213,304.55 | |||
| 2 | $83,070.24 | $68,653.09 | -$144,651.45 | |||||
| Net Present Value (NPV) = | $136,997.87 | 3 | $172,620.29 | $129,692.18 | -$14,959.28 | |||
| IRR = | 27% | 4 | $137,957.29 | $94,226.69 | $79,267.41 | |||
| Discounted Payback = | 3.16 | Years | 5 | $92,975.49 | $57,730.46 | $136,997.87 | ||
| The discount rate is typically set equal to a firm’s cost of capital. This rate is used to discount future figures back to today’s dollars. This is necessary when computing the NPV and discounted payback period. The weighted average costs of capital represents how much it costs a company to raise one dollar of investment capital. It is always expressed as a %. In this scenario, the cost of capital is 10%, which means it costs the company 10 cents to raise one $1 of capital. This is important when needing to interpret the internal rate of return (IRR). The IRR is always expressed as a % and refers to the expected return for every $1 invested in a project. In this case, the company expects an IRR of 33%, which means that anticipate earnes 33 cents on every $1 invested in the project. If the cost of capital is 10 center to raise a dollar of capital and the IRR is 33 cents per dollar of invested capital, then the firm stands to make 23 cents in profit for each $1 invested. This of course assumes that the financial assumptions and cash flow projections were accurate. Typically, a firm will expect a 20% to 30% IRR to consider an investment opportunity. This takes into account possible issues with the underlying assumptions. | ||||||||
Program #2
| Stage 1: Depreciation (25% reducing balance) | Salvage Value: | $ 50,000.00 | ||||||
| Years | Initial Value | Depreciation | Residual Value | |||||
| 1 | $325,000.00 | $81,250.00 | $243,750.00 | |||||
| 2 | $243,750.00 | $60,937.50 | $182,812.50 | |||||
| 3 | $182,812.50 | $45,703.13 | $137,109.38 | |||||
| 4 | $137,109.38 | $34,277.34 | $102,832.03 | |||||
| 5 | $102,832.03 | $52,832.03 | $50,000.00 | |||||
| Operating Revenues | Inflationary Adjustment to Revenues: | 2.00% | ||||||
| Years | Volume | Price per Unit of Service | Operating Revenue | |||||
| 1 | 3,500 | $135.00 | $472,500.00 | |||||
| 2 | 7,000 | $137.70 | $963,900.00 | |||||
| 3 | 9,500 | $141.14 | $1,340,853.75 | |||||
| 4 | 8,000 | $144.67 | $1,157,368.50 | |||||
| 5 | 4,200 | $148.29 | $622,808.92 | |||||
| Operating Costs | Inflationary Adjustment to Costs: | 10% | ||||||
| Years | Volume | Cost per Unit of Service | Operating Costs | |||||
| 1 | 3500 | $87.00 | $304,500.00 | You’ll notice that the volume increases as the technology is implemented, reaches its’ high point in year 3, and then begins a decline. Why is this? This is due to market forces such as increased competition. | ||||
| 2 | 7000 | $95.70 | $669,900.00 | |||||
| 3 | 9500 | $105.27 | $1,000,065.00 | |||||
| 4 | 8000 | $115.80 | $926,376.00 | |||||
| 5 | 4000 | $127.38 | $509,506.80 | |||||
| Stage 2 | Revenues in Excess of Expenses | Corporate Tax Rate: | 28% | [Federal & State] | ||||
| Years | ||||||||
| 1 | 2 | 3 | 4 | 5 | ||||
| Operating Revenues | $472,500.00 | $963,900.00 | $1,340,853.75 | $1,157,368.50 | $622,808.92 | |||
| Operating Costs | $304,500.00 | $669,900.00 | $1,000,065.00 | $926,376.00 | $509,506.80 | |||
| Depreciation | $81,250.00 | $60,937.50 | $45,703.13 | $34,277.34 | $52,832.03 | |||
| Earnings Before Tax (EBT) | $86,750.00 | $233,062.50 | $295,085.63 | $196,715.16 | $60,470.09 | |||
| Tax Rate (28%) | $24,290.00 | $65,257.50 | $82,623.97 | $55,080.24 | $16,931.63 | |||
| Net Income | $62,460.00 | $167,805.00 | $212,461.65 | $141,634.91 | $43,538.47 | Working capital is made up of the firm’s current assets, which includes cash, short-term securities, account receivables, prepaid expenses, and inventory. The current assets are located in the balance sheet. | ||
| Stage 3: Cash Flow Estimations | Net Working Capital = 20% of Revenues | |||||||
| Years | ||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | |||
| Net Working Capital (Current Assets) | $94,500.00 | $192,780.00 | $268,170.75 | $231,473.70 | $124,561.78 | $0.00 | ||
| Change in NWC | -$94,500.00 | -$98,280.00 | -$75,390.75 | $36,697.05 | $106,911.92 | $124,561.78 | ||
| Years | ||||||||
| Cash Flow from Operations | 0 | 1 | 2 | 3 | 4 | 5 | ||
| Net Income | $62,460.00 | $167,805.00 | $212,461.65 | $141,634.91 | $43,538.47 | |||
| Depreciation | $81,250.00 | $60,937.50 | $45,703.13 | $34,277.34 | $52,832.03 | |||
| Net Cashflow from Operations | $143,710.00 | $228,742.50 | $258,164.78 | $175,912.26 | $96,370.50 | |||
| Years | ||||||||
| Cash Flow from Investments | 0 | 1 | 2 | 3 | 4 | 5 | ||
| Machine #2 | -$325,000.00 | $50,000.00 | ||||||
| Change in Net Cash Flow (NCF) | -$94,500.00 | -$98,280.00 | -$75,390.75 | $36,697.05 | $106,911.92 | $124,561.78 | ||
| Total NCF (Investments + Ops) | -$419,500.00 | $45,430.00 | $153,351.75 | $294,861.83 | $282,824.17 | $220,932.28 | ||
| Present Value (PV) | -$419,500.00 | $41,300.00 | $126,736.98 | $221,534.05 | $193,172.71 | $137,181.57 | ||
| Cumulative Discounted Cashflows | -$419,500.00 | -$378,200.00 | -$251,463.02 | -$29,928.96 | $163,243.75 | $300,425.32 | ||
| Stage 4: Capital Analyses | Discounted Cash Flows | |||||||
| Years | Cash Flows | Cash Flows discounted to today’s $$ | Cumulative Discounted CFs | |||||
| Discount Rate (r) = | 10% | 0 | -$419,500.00 | -$419,500.00 | -$419,500.00 | |||
| Weighted Average Cost of Capital = | 10% | 1 | $45,430.00 | $41,300.00 | -$378,200.00 | |||
| 2 | $153,351.75 | $126,736.98 | -$251,463.02 | |||||
| Net Present Value (NPV) = | $300,425.32 | 3 | $294,861.83 | $221,534.05 | -$29,928.96 | |||
| IRR = | 30% | 4 | $282,824.17 | $193,172.71 | $163,243.75 | |||
| Discounted Payback = | 3.155 | Years | 5 | $220,932.28 | $137,181.57 | $300,425.32 |
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Stage 1: Depreciation (25% reducing balance)
Years
Initial Value
Depreciation
1
$170,000.00
$42,500.00
2
$127,500.00
$31,875.00
3
$95,625.00
$23,906.25
4
$71,718.75
$17,929.69
5
$53,789.06
$13,789.06
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