Cash Patent Total Assets Table 1 Current Balance Sheet and New Capital Requirement Current Balance Sheet Capital Required For Venture (In Millions) Purchase of Equipment $ 1,000 400,000 Purchase of Land Construction $401,000 Working capital $10 5 35 5 Accounts Payable $ 1,000 Total requirement Loans from friends $55 and relatives 250,000 Total Liabilities $251,000 Common Stock 100 Additional paid-in capital 149,900 Total Liabilities and Equities $401,000 Table 2 Projected Cash Flow Statements (In Millions) Sales Cost of goods sold Gross margin General/administrative expenses Debt service requirements Pre-tax earnings Taxes Net income Depreciation/amortization Terminal value Net cash flow Notes: (a) (b) Year 1 Year 2 Year 3 Year 4 Year 5 $20 $53 $102 $117 10 $129 26 51 59 $10 65 $27 $51 $ 58 $64 5 10 19 23 25 5 5 10 $12 $27 $30 $29 5 12 13 14 $0 $7 $ 15 $ 17 $ 15 2 6 6 6 6 116 $2 $13 $21 $23 $137 Depreciation/amortization expense is included in the cost of goods sold, yet it is a noncash charge. Thus, it must be added back to net income to obtain the net cash flow in each year. The terminal value is the present value, as of the end of Year 5, of the equity cash flows that are expected to occur after Year 5. This value was obtained by assuming 10 percent annual growth in equity cash flows after Year 5 and a cost of equity of 30 percent: $21(1.10) Terminal value = = $116. 0.30-0.10