Estimate and enter the required NWC at the beginning of each year (t=0 for year 2021, t = 1 for year 2022, and so on).

The required NWC is 12% of anticipated sales for the following year. Then, calculate the change in NWC for years 2021 to 2025. At the end of the project (t=5), the full amount of the project is recuperated in full.

Estimate and enter depreciation expense for years 2021 to 2025. Depreciation expense is based on the cost of the equipment + installation costs, ending book value, and the life of the asset (5 years). Apply formula 12-2). Then, estimate the book value. Book value at t =1 equals book value at t = 0 minus depreciation expense for the year 2021.

All data is provided by the case. There is an initial cash outflow at t=0 to pay for the equipment and its installation. There is an inflow at t=5 when the equipment is sold at its resale value. The business will record a capital gain or a capital loss. So, there is a tax effect to be calculated. It will be negative in the case of a capital gain (the gain increases net income and the tax liability), it will be positive in the case of a capital loss (the loss will decrease net income and the tax liability). To estimate the tax effect, compare the resale value and the book value at t=5, take the difference, and apply the tax rate.

Complete the Free Cash Flow Table. Sales: copy from above. Fixed costs: Apply the selected % rate to sales Depreciation: Copy from above EBIT = Sales Fixed Cost Depreciation Taxes: Apply the selected rate to EBIT. Net Income = EBIT Taxes Depreciation: Copy from above Operational Cash Flow: Net Income + Depreciation Change in Net Working Capital: Copy from above Change in Fixed assets: Copy from above. Free Cash Flow: Operational Cash Flow - Change in Net Working Capital - Change in Fixed Assets.

Select your own discount rate. Estimate the standard set of capital budgeting criteria: Pay-back (years), Discounted Pay-Back (years), Profitability Index (number), Net Present Value ($), Internal Rate of Return (%).

Data $400,000 and $800,000 500,000 Sales year 2021 Sales Growth Rate Fixed cost (% of sales) Select a yearly amount between Select a growth rate between and 8% 5% Select a rate between 80% and 90% 80% Tax Rate Select a tax rate between 2256 and 2896 2296 NWC as percentage of Sales Select a tax rate between 10% and 15% 1096 S 200,000 $ 16,000 Equipment Cost at t = 0 Installation Costs at t = 0 Resale Value at t = 5 Ending Book Value t=0 indicates the beginning of 2021, t=1 indicates the ending of year 2021 and the beginning of year 2022, ... $ 40,000 21,600 S Sales Projection 2021 2022 2023 2024 2025 0 1 2 3 4 5 Sales Projection $ 510,000 $ 540,600 $ 573,036 $ 607,418 $ 643,863 Net Working Capital Cash Flows 2021 2022 2023 2024 2025 1 2 3 4 5 Required NWC Change in NWC Depreciation Table 2021 2022 2023 2024 2025 5 C 1 2 3 4 Annual Depreciation Book Value Fixed Assets Cash Flows 2021 2022 2024 2025 2023 3 1 2 4 5 Equipment Installation Costs Resale Value Tax effect Change in Fixed Assets Free Cash Flow 2023 2024 2025 2021 1 2022 2 0 3 4 5 Sales u un - Fixed Costs Depreciation $ EBIT $ - Taxes $ Net Income $ $ $ + Depreciation Operational Cash Flow - Change Net Working Capital Change Fixed Assets FREE CASH FLOW $ S $ Cummulative Free Cash Flow Present Value FCF Cummulative Present Value FCF Capital Budgeting Criteria Discount rate years Pay_Back (years) Discounted Pay_Back (years) Profitability Index years The discount rate of return is the expected or required rate of return for an investment in a project or a business venture. Also known as the cost of capital, it is used to estimate the current value of an investment based on its expected future cash flows. The required rate of return differs from investor to investor. Select your own discount rate. Net Present Value NPV dollars Internal Rate of Return IRR Data $400,000 and $800,000 500,000 Sales year 2021 Sales Growth Rate Fixed cost (% of sales) Select a yearly amount between Select a growth rate between and 8% 5% Select a rate between 80% and 90% 80% Tax Rate Select a tax rate between 2256 and 2896 2296 NWC as percentage of Sales Select a tax rate between 10% and 15% 1096 S 200,000 $ 16,000 Equipment Cost at t = 0 Installation Costs at t = 0 Resale Value at t = 5 Ending Book Value t=0 indicates the beginning of 2021, t=1 indicates the ending of year 2021 and the beginning of year 2022, ... $ 40,000 21,600 S Sales Projection 2021 2022 2023 2024 2025 0 1 2 3 4 5 Sales Projection $ 510,000 $ 540,600 $ 573,036 $ 607,418 $ 643,863 Net Working Capital Cash Flows 2021 2022 2023 2024 2025 1 2 3 4 5 Required NWC Change in NWC Depreciation Table 2021 2022 2023 2024 2025 5 C 1 2 3 4 Annual Depreciation Book Value Fixed Assets Cash Flows 2021 2022 2024 2025 2023 3 1 2 4 5 Equipment Installation Costs Resale Value Tax effect Change in Fixed Assets Free Cash Flow 2023 2024 2025 2021 1 2022 2 0 3 4 5 Sales u un - Fixed Costs Depreciation $ EBIT $ - Taxes $ Net Income $ $ $ + Depreciation Operational Cash Flow - Change Net Working Capital Change Fixed Assets FREE CASH FLOW $ S $ Cummulative Free Cash Flow Present Value FCF Cummulative Present Value FCF Capital Budgeting Criteria Discount rate years Pay_Back (years) Discounted Pay_Back (years) Profitability Index years The discount rate of return is the expected or required rate of return for an investment in a project or a business venture. Also known as the cost of capital, it is used to estimate the current value of an investment based on its expected future cash flows. The required rate of return differs from investor to investor. Select your own discount rate. Net Present Value NPV dollars Internal Rate of Return IRR