127 fx B 4 5 =$D$23+$D$24 D E F G H K do not round any calculations M N P Q R S 9 10 Given Information WACC: (from calculation below) Corporate Marginal Tax rate: Calculations 7.9% Year 10 22.0% 11 12 New product line information Revenue on new Product Line COGS: 6,520,000 3,872,880 13 Year 1 revenues: 6,520,000 Sales, General Admin Costs 527,500 14 Annual Revenue Growth rate: 6.5% 15 Year 1 COGS %: 59.4% Depreciation (from schedule below) EBIT 1,961,322 6.943.800 4,089,898 521,170 3.206,082 7.395.147 4,318,766 514,916 2,040,522 158,298 (873,350) 16 16 Annual reduction in COGS%: 0.5% Taxes 17 1/ Net Income 18 Initial Incremental SGA 527,500 Add Back: Depreciation (from schedule) 19 Annual Reduction in SG&A 1.2% 20 Increase in NWC required: 690,000 Less: Erosion Costs (from schedule) Operating Cash Flows 34,826 123,472 1,961,322 248,316 1,836,478 (192,137) (681,213) 3,206,082 264,209 2,260,660 520,943 114,608 406,336 2,040,522 281,118 2,165,740 7,875,832 4,560,106 508,737 1,307,746 1,499,242 329,833 1,169,409 1,307,746 8,387,761 4,814,575 502,632 1.158.938 1,911,616 420,555 1,491,060 1,158,938 299,110 2,178,045 318,253 2,331,746 21 22 Start-up costs: Incremental Costs: 407,886 2,972,368 Enter all revenues and costs as positive numbers, then account for inflows versus outflows in the subtotals and totals. It is possible for Taxes to be negative 8,932,965 5,082,857 496,601 766,106 2,587,401 569,228 2,018,173 766,106 338,621 2,445,658 9.513.608 5,365,675 490,641 373,274 3,284,018 722,484 2,561,534 373,274 10,131,992 5,663,784 484,754 186,010 3,797,445 835,438 2,962,007 186,010 10,790,572 5,977,977 478,937 11,491,959 6,309,085 473,189 4,333,658 953,405 3,380,254 4,709,684 1,036,131 3,673,554 0 0 360,293 2,574,515 383,351 433,990 2,764,666 3,239,563 Training on new product line 990,000 Capital Spending 11,000,000 Prior research into new prod. line 398,600 Start-up Costs 26 Annual warehouse rental lost 375,000 27 28 Existing Product Lines Erosion: After-Tax Proceeds of Disposals Change in Net Working Capital Relevant Opportunity costs: Incremental Cash Flow 990,000 588,652 (11,401,348) 690,000 1,388,600 (242,122) 690,000 1.388.600 872,060 1,388,600 777,140 1.388,600 789,445 1,388,600 943,146 1,388,600 1,057,058 1.388.600 1,185,915 1,388,600 1,376,066 1.388.600 1,583,768 1.388.600 2,540,963 29 Revenue erosion year 1: 874,600 30 Increased erosion per year: 6.4% Discounted Cash Flows: (11,401,348) (224,384) 31 COGS %: 63.6% Cumulative Cash Flow: (242,122) Cumulative Discounted Cash Flow: (11,625,732) 748,968 629,938 (10,876,764) 618,549 1,649,200 (10,258,215) 582.312 1,566,585 (9,675,903) 644,720 1,732,591 (9,031,183) 669,653 2,000,204 (8,361,531) 696,246 2,242,974 (7,665,285) 748,698 2,561,981 (6,916,587) 798,578 2,959,834 (6,118,009) 1,187,361 4,124,731 (4,930,648) 33 34 New Equipment Required: Net Present Value 9,982,163 35 Cost MACRS Life IRR -0.7% 26 machine 1 37 51 machine 2 6,820,000 4,180,000 5 7 Payback Discounted Payback 38 50 Profitability Index: 11 0.95 59 39 Disposal of Existing machinery 41 machine a 12 machine b 43 Cost 5,000,000 3,500,000 Book Value Proceeds 401,600 410,000 200,000 175,000 3 4 9 10 0 Schedule: Revenue Erosion Costs Schedule: G/L on Disposals (net of Tax) Lost Revenue 45 Related COGS Gain/(Loss) 47 machine a machine b 49 Total 50 51 8,400 (25,000) Tax on G/L (1,848) 5,500 Net Proceeds Gross profit 408,152 Taxes 180,500 Net Erosion Costs 874,600 930,574 556,246 591,845 318,354 70,038 248,316 338,729 74,520 264,209 990,131 629,723 360,408 79.290 281,118 1,053,500 670,026 1,120,924 712,907 383,474 408,016 1,192,663 758,533 434,129 1,268,993 807.080 1,350,209 858,733 1,436,622 913,692 1,528,566 972,168 461.913 491,476 522,930 556,398 84,364 299,110 89,764 318,253 95,508 101,621 108,125 115,045 122,408 338,621 360,293 383,351 407,886 433.990 588,652 Schedule: Depreciation machine 1 (5 year MACRS Life) 1,364,000 2,182,400 1,309,440 785,664 785,664 392,832 TRUE