1 2 Initial Cost 3 Installation Cost 4 Increase in NWC Salvage Value 5 6 7 8 Units sold 9 Depreciation Rate 10 11 Years 12 Sales 13 Variable Cost 14 Fixed Cost 15 EBITDA 16 Depreciation 17 EBIT 18 Tax Expense 19 Net Income A 20 21 22 Operating Cash Flow 23 Capital Spending Cash Flow 24_Net Working Capital Cash Flow 25 Total Cash Flows 26 Total Cumulative Cash Flows 27 Internal Rate of Return 28 Net Present Value 29 B $ 2,000,000 Price $ 150,000 Variable Cost 90,000 Fixed Cost $ $ 60,000 Year 0 D ORIGINAL SCENARIO Year 1 55,000 20.0% 1 $1,925,000 $825,000 $200,000 $900,000 $430,000 $470,000 $188,000 $282,000 Year 1 $ $35.00 Tax Rate $15.00 Required Return 200,000 Year 2 65,000 32.0% $2,275,000 $975,000 $200,000 $1,100,000 $688,000 $412,000 $164,800 $247,200 Year 2 E Payback Period Profitability Index Year 3 75,000 19.0% F LL Year 3 40% Year 4 85,000 12.0% G Year 4 Year 5 95,000 11.0% H Year 5 Year 6 3 4 6 $2,625,000 $2,975,000 $3,325,000 $2,975,000 $1,125,000 $1,275,000 $1,425,000 $1,275,000 $200,000 $200,000 $200,000 $200,000 $1,300,000 $1,500,000 $1,700,000 $1,500,000 $408,500 $258,000 $236,500 $129,000 $891,500 $1,242,000 $1,463,500 $1,371,000 $356,600 $496,800 $585,400 $548,400 $534,900 $745,200 $878,100 $822,600 85,000 6.0% Year 6 Initial Cost Installation Cost Increase in NWC Salvage Value Units sold Depreciation Rate Years Sales Variable Cost Fixed Cost EBITDA Depreciation EBIT Tax Expense Net Income Operating Cash Flow Capital Spending Cash Flow Net Working Capital Cash Flow Total Cash Flows Total Cumulative Cash Flows Internal Rate of Return Net Present Value Year 0 PRICE REDUCTION SCENARIO Price Variable Cost Fixed Cost Year 1 1 Year 1 Year 2 2 Year 2 Tax Rate Required Return Payback Period Profitability Index Year 3 3 Year 3 Year 4 Year 4 Year 5 5 Year 5 Year 6 6 Year 6 Initial Cost Installation Cost Increase in NWC Salvage Value Original Volume Sold Reduced Volume Sold Depreciation Rate Years Sales Variable Cost Fixed Cost EBITDA Depreciation EBIT Tax Expense Net Income Operating Cash Flow Capital Spending Cash Flow Net Working Capital Cash Flow Total Cash Flows Total Cumulative Cash Flows Internal Rate of Return Net Present Value Year 0 VOLUME REDUCTION SCENARIO Tax Rate Required Return Price Variable Cost Fixed Cost Year 1 1 Year 1 Year 2 Year 2 Payback Period Profitability Index Year 3 3 Year 3 Year 4 Year 4 Year 5 Year 5 Year 6 6 Year 6 Project K: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $150,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $90,000. The project will last 6 years at which time the market value for the equipment will be $60,000. The project will project a product with a sales price of $35.00 per unit and the variable cost per unit will be $15.00. The fixed costs would be $200,000 per year. Because this project is not close to current products sold by the business, management wants adjust the risk profile of this analysis by imposing a 2 percentage point increase over the firm's WACC. Years 2014 Forecasted Units Sold 55,000 2015 65,000 2016 75,000 2017 85,000 2018 95,000 2019 85,000 1 2 Initial Cost 3 Installation Cost 4 Increase in NWC Salvage Value 5 6 7 8 Units sold 9 Depreciation Rate 10 11 Years 12 Sales 13 Variable Cost 14 Fixed Cost 15 EBITDA 16 Depreciation 17 EBIT 18 Tax Expense 19 Net Income A 20 21 22 Operating Cash Flow 23 Capital Spending Cash Flow 24_Net Working Capital Cash Flow 25 Total Cash Flows 26 Total Cumulative Cash Flows 27 Internal Rate of Return 28 Net Present Value 29 B $ 2,000,000 Price $ 150,000 Variable Cost 90,000 Fixed Cost $ $ 60,000 Year 0 D ORIGINAL SCENARIO Year 1 55,000 20.0% 1 $1,925,000 $825,000 $200,000 $900,000 $430,000 $470,000 $188,000 $282,000 Year 1 $ $35.00 Tax Rate $15.00 Required Return 200,000 Year 2 65,000 32.0% $2,275,000 $975,000 $200,000 $1,100,000 $688,000 $412,000 $164,800 $247,200 Year 2 E Payback Period Profitability Index Year 3 75,000 19.0% F LL Year 3 40% Year 4 85,000 12.0% G Year 4 Year 5 95,000 11.0% H Year 5 Year 6 3 4 6 $2,625,000 $2,975,000 $3,325,000 $2,975,000 $1,125,000 $1,275,000 $1,425,000 $1,275,000 $200,000 $200,000 $200,000 $200,000 $1,300,000 $1,500,000 $1,700,000 $1,500,000 $408,500 $258,000 $236,500 $129,000 $891,500 $1,242,000 $1,463,500 $1,371,000 $356,600 $496,800 $585,400 $548,400 $534,900 $745,200 $878,100 $822,600 85,000 6.0% Year 6 Initial Cost Installation Cost Increase in NWC Salvage Value Units sold Depreciation Rate Years Sales Variable Cost Fixed Cost EBITDA Depreciation EBIT Tax Expense Net Income Operating Cash Flow Capital Spending Cash Flow Net Working Capital Cash Flow Total Cash Flows Total Cumulative Cash Flows Internal Rate of Return Net Present Value Year 0 PRICE REDUCTION SCENARIO Price Variable Cost Fixed Cost Year 1 1 Year 1 Year 2 2 Year 2 Tax Rate Required Return Payback Period Profitability Index Year 3 3 Year 3 Year 4 Year 4 Year 5 5 Year 5 Year 6 6 Year 6 Initial Cost Installation Cost Increase in NWC Salvage Value Original Volume Sold Reduced Volume Sold Depreciation Rate Years Sales Variable Cost Fixed Cost EBITDA Depreciation EBIT Tax Expense Net Income Operating Cash Flow Capital Spending Cash Flow Net Working Capital Cash Flow Total Cash Flows Total Cumulative Cash Flows Internal Rate of Return Net Present Value Year 0 VOLUME REDUCTION SCENARIO Tax Rate Required Return Price Variable Cost Fixed Cost Year 1 1 Year 1 Year 2 Year 2 Payback Period Profitability Index Year 3 3 Year 3 Year 4 Year 4 Year 5 Year 5 Year 6 6 Year 6 Project K: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $150,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $90,000. The project will last 6 years at which time the market value for the equipment will be $60,000. The project will project a product with a sales price of $35.00 per unit and the variable cost per unit will be $15.00. The fixed costs would be $200,000 per year. Because this project is not close to current products sold by the business, management wants adjust the risk profile of this analysis by imposing a 2 percentage point increase over the firm's WACC. Years 2014 Forecasted Units Sold 55,000 2015 65,000 2016 75,000 2017 85,000 2018 95,000 2019 85,000