FORMULA SHEET CFFA = Operating Cash Flow (OCF) - Net Capital Spending (NCS) - A in NWC Ain NWC = Ending NWC - Beginning NWC Methods for Computing OCF Top-Down Approach Bottom-Up Approach Tax Shield Approach OCF = EBIT + Depreciation - Taxes OCF = Net Income + Depreciation OCF = (Sales - Costs) (1-Tax) + (Depreciation) (Tax) Component in Net Capital Spending Initial Cost > Depreciation = Number of Years > Book Value = Initial Cost - Accumulated Depreciation > After Tax Salvage = SV-T (SV - BV) 1. Global Line Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of $800,000. The fixed asset will be depreciated straight-line to zero over its 4-year life, after which time it will have a market value of $100,000 (before taxes). The project requires an initial investment in net working capital of $45,000. The project is estimated to generate $724,000 in annual sales, with costs of $480,000. The tax rate is 40 percent and the required return on the project is 14 percent. What is the NPV of this project? Should we accept this project? 2. Luxury Car Corp is considering a four-year project to improve its production efficiency. Buying a new machine press for $237,600 is estimated to result in $179,200 in annual pretax cost savings. The new machine will be depreciated in straight line basis and it will have a salvage value at the end of the project of $78,400 (before taxes). The press also requires an initial investment in net working capital of $28,400. If the shop's tax rate is 34 percent and its discount rate is 19 percent, what is the NPV for this project