Compare cost of capital and IRR based on document attached.

Figure 13-1 Analysis of an Expansion Project: Inputs and Key Results (Dollars in Thousands) Part 1. Inputs and Key Results Inputs Equipment cost Salvage value, equipment, Year 4 Base-Case Key Results $2,850 $500 NPV $1,029 IRR 21.60% Opportunity cost $0 MIRR 18.61% Externalities (cannibalization) $0 PI 1.30 Payback Discounted payback 3.13 Units sold, Year 1 Annual change in units sold, after Year 1 Sales price per unit, Year 1 Annual change in sales price, after Year 1 Variable cost per unit (VC), Year 1 Annual change in VC, after Year 1 Nonvariable cost (Non-VC), Year 1 Annual change in Non-VC, after Year 1 2,500 20% 3.49 $1.80 2% $1.00 2% $1,200 2% Project cost of capital, r 11% Tax rate 30% Working capital as % of next year's sales 12% Figure 13-2 Analysis of a New (Expansion) Project: Cash Flows and Performance Measures (Dollars in Thousands) Part 2. Cash Flows and Performance Measures Intermediate Calculations Unit sales Sales price per unit Variable cost per unit (excl. depr.) Nonvariable costs (excl. depr.) Sales revenues = Units Price/unit NOWCt = 15%(Revenuest+1) Basis for depreciation 0 1 2,500 $1.80 $1.00 $1,200 $4,500 2 3,000 $1.84 $1.02 $1,224 $5,508 3 3,600 $1.87 $1.04 $1,248 $6,742 4 4,320 $1.91 $1.06 $1,273 $8,252 $540 $2,850 $661 $809 $990 $0 33.33% 44.45% 14.81% 7.41% $950 $1,267 $422 $211 $633 $211 Cash Flows at End of Year 2 3 $5,508 $6,742 $3,060 $3,745 $1,224 $1,248 $1,267 $422 $43 $1,326 $13 $398 $30 $928 $1,267 $422 $0 Annual depreciation rate (MACRS) Annual depreciation expense Remaining undepreciated value (book value) Cash Flow Forecast $1,900 0 Sales revenues = Units Price/unit Variable costs = Units Cost/unit Nonvariable costs (excluding depr.) Depreciation Earnings before int. and taxes (EBIT) Taxes on operating profit (40% rate) Net operating profit after taxes Add back depreciation Equipment purchases Salvage value 1 $4,500 $2,500 $1,200 $950 $150 $45 $105 $950 4 $8,252 $4,584 $1,273 $211 $2,183 $655 $1,528 $211 $2,850 $500 Cash flow due to tax on salv. val. Cash flow due to change in WC Opportunity cost, after taxes After-tax externalities Project net cash flows: Time Line $540 $0 $3,390 Project Evaluation Measures NPV IRR $1,029 21.60% =NPV(E69,F111:I111)+E111 =IRR(E111:I111) MIRR 18.61% =MIRR(E111:I111,E69,E69) $121 $0 $0 $724 Profitability index 1.30 =NPV(E69,F111:I111)/(E111) Payback 3.13 =PERCENTRANK(E120:I120,0,6)*I119 Disc. payback 3.49 =PERCENTRANK(E122:I122,0,6)*I119 Calculations for Payback Cumulative cash flows for payback Disc. cash flows for disc. payback Cumulative discounted cash flows Year: 0 $3,390 $3,390 $3,390 1 $2,666 $652 $2,738 $148 $0 $0 $1,089 $181 $0 $0 $1,169 $150 $990 $0 $0 $3,079 2 $1,577 $884 $1,854 3 $408 $855 $999 4 $2,671 $2,029 $1,029