Please see the table below. Since all the steps are sequential, I have converted the same into a tabular form.
Please be guided by the sign [+] / [-] against each variable in the first column.This will help you understand whether a particular variable has been added or subtracted.
Please be guided by the second column called "Linkage". This will help you understand the mathematics behind each row.
All the four subparts have been solved at appropriate place in the table itself.
Year, N | Linkage | 0 | 1 | 2 | 3 |
Purchase cost of new equipment | A | 4,400,000 | |||
Investment in working capital | B | 1,500,000 | |||
Total Initial Investment | C = A + B | 5,900,000 | |||
Depreciation schedule | D | 33% | 45% | 15% | |
Depreciation | E = D x A | 1,452,000 | 1,980,000 | 660,000 | |
Accumulated Depreciation | F = Sum of E | 1,452,000 | 3,432,000 | 4,092,000 | |
Tax Basis (Asset balance) | G = A - F | 4,400,000 | 2,948,000 | 968,000 | 308,000 |
Units of Output | H | 95,000 | 107,000 | 110,000 | |
Sale Price per unit | I | 330 | 330 | 330 | |
Variable cost per unit | J | 280 | 280 | 280 | |
Annual Operating Cash flows | |||||
Revenue | K = H x I | 31,350,000 | 35,310,000 | 36,300,000 | |
[-] Variable Costs | L = H x J | 26,600,000 | 29,960,000 | 30,800,000 | |
[-] Fixed Costs | M | 1,750,000 | 1,750,000 | 1,750,000 | |
[-] Depreciation | E (as above) | 1,452,000 | 1,980,000 | 660,000 | |
EBIT | N = K-L-M-E | 1,548,000 | 1,620,000 | 3,090,000 | |
[-] Taxes | O = 40% x N | 619,200 | 648,000 | 1,236,000 | |
NOPAT | P =N - O | 928,800 | 972,000 | 1,854,000 | |
[-] Post tax reduction in existing cash flows | P' | 88,000 | 88,000 | 88,000 | |
Annual Operating Cash flows | Q = P + E - P' | 2,292,800 | 2,864,000 | 2,426,000 | |
Sale value of the machine | R | 100,000 | |||
Gain / (Loss) on sale | S = R - G | (208,000) | |||
Tax on gain / loss | T = S x 40% | (83,200) | |||
Terminal Cash flows | |||||
Post tax salvage value | U = R - T | 183,200 | |||
Release of working capital | B (as above) | 1,500,000 | |||
Terminal Cash flows | V = U + B | 1,683,200 | |||
Net Cash flows | W = -C + Q + V | (5,900,000) | 2,292,800 | 2,864,000 | 4,109,200 |
Cumulative cash flows | Sum of W | (5,900,000) | (3,607,200) | (743,200) | 3,366,000 |
Part (i) Payback Period | 2.18 | =2+743,200/4,109200 | |||
Cost of Capital | X | 12% | |||
Discount Factor | Y = (1 + X)-N | 1.0000 | 0.8929 | 0.7972 | 0.7118 |
PV of cash flow | Z = W x Y | (5,900,000) | 2,047,143 | 2,283,163 | 2,924,847 |
Part (ii) NPV | AA = Sum of Z | 1,355,154 | |||
Part (iii) IRR | 24% | =IRR(-5900000,2292800,2864000,4109200) | |||
Part (iv) Profitability Index | (AA + C) / C | 1.23 |
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