Template for Questions 21 and 23 in HW 7 21. Plant and equipment = $45,000 to be depreciated to zero for 4 years using straight line. Depreciation expense = 45,000/4 = 11,250 per year.

Year Year Year Year Year 0 1 2 3 4

Net working capital (20% of revenue in the following year) Change in NWC Change in NWC after reversing the sign Investment in plant & equipment Disposal of machine & equipment

Cash flow from investments in NWC and in fixed assets Year Year Year Year Year 0 1 2 3 4

Revenue (given) Cost (40% of revenue) Depreciation Pretax profit = Rev - Cost - Dep Taxes at 40% of the pretax profit Net income = Pretax profit - taxes Depreciation Operating cash flow = Net income + depreciation Total cash flow = Operating Cash flow + Cash flow from investments in NWC and in fixed assets

NPV

23. The machine costs $100,000 to be depreciated using straight line to the salvage value of 20,000 over 5 years. Hence, the depreciation expense is (100,000 – 20,000)/5 = 16,000 per year. It is assumed that at the end of year 5, the machine can be sold for $30,000. Book value at the end of year 5 = 100,000 - (5x16,000) = $20,000. Selling = $30,000 - tax on gains = -0.35(30,000 - 20,000) = $3,500 After-tax net proceed at the end of year 5 = 30,000 – 3,500 = $26,500. The project also requires a working capital of $10,000 which will be kept at that level each year.

Year Year Year Year Year Year 0 1 2 3 4 5

Net working capital

Change in NWC Change in NWC after reversing the sign

Investment in plant & equipment Disposal of machine & equipment

Cash flow from investments in NWC and in fixed assets

Year Year Year Year Year Year 0 1 2 3 4 5

Revenue (given, cost savings per year)

Cost

Depreciation (from calculation above)

Pretax profit = Rev - Cost - Dep

Taxes at 35% of pretax profit

Net income = Pretax profit - taxes

Depreciation

Operating cash flow = Net income + Depreciation

Total cash flow = Operating cash flow + Cash flow from investments in NWC and in fixed assets

NPV