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Depreciation Schedule Modified Accelerated Cost Recovery System (MACRS)

Ownership Years 1-6

Depreciation Schedule 20%; 32%; 19%; 12%; 11%; 6%

1.Net Present Value of Discounted Cash Flow (use WACC number for discount rate)

2.Internal Rate of Return

3.Payback Period

4.Profitability Index (use WACC number for discount rate)

Project E

This project requires initial investment of $2,000,000 in equipment, which will cost an additional $100,000 to install. Firm will use attached MACRS depreciation schedule to expense equipment. Once equipment is installed, company will need to increase net working capital by $200,000. Project will last 6 years, at which time market value for equipment will be $100,000. Project anticipates product with sales price of $22.00/unit and variable cost per unit will be $10.00. Fixed costs would be $250,000 per year. Since this project is close to current products sold by business, management wants to use current WACC as valuation hurdle it must meet or surpass.

Years 2014 - 2019

Forecasted Units Sold 100,000; 90,000; 80,000; 70,000; 60,000; 50,000

Project H

Initial investment of $2,000,000 in equipment - cost additional $100,000 to install. Firm will use attached MACRS depreciation schedule to expense equipment. Company needs to increase net working capital by $80,000. Project will last 6 years, at which time market value for equipment will be $10,000. Project anticipates product with sales price of $100.00/unit and variable cost per unit will be $45.00. Fixed costs would be $550,000 per year. Since this project is very different from current products sold by business, management has imposed 3-percentage point premium above current WACC as valuation hurdle it must meet or surpass.

Years 2014-2019

Forecasted Units Sold 19,000; 45,000; 38,000; 32,000; 18,000; 12,000