nvesumuIt IVUSUTIent years or oquipment usaye t= t= t= t= t= 6 Part 1: Before replacement 9.4% Discount rate: 3 4 Tax Rate: 20.0% 2,500 (1,125) (200) 1,175 2,500 (1,125) (200) 1,175 2,500 2,500 (1,125) (200) 1,175 Sales Revenue Expenses other than Depreciation Depreciation (1,125) (200) 1,175 After Before 10 Sales Revenue (constant) 12 Expenses other than Depreciation 13 Cost of equipment 14 Expected life of equipment 15 Depreciation (straight line) 2,500 2,500 1,125 1,600 11 500 EBIT EBIT After Taxes** Add back: Depreciation Free Cash Flow (Before) 2,000 940 940 940 940 6 200 200 200 200 1,140 1,140 below 200 1,140 1,140 16 Part 2: After replacement 17 18 Disposal of Old Equipment: Old equipment was depreciated on a straight-line basis see handout Net cost of new Equipment Sale of old equipment Tax on Gain / Loss: (2,000) 19 510 20 58 21 22 Age of old equipment: 23 Accum. Deprec. On old equip: 24 Net Book Value of old equip: 25 Proceeds of sale: 26 Gain/ (Loss) 27 Tax on Gain (Loss)* Sales Revenue 4 2,500 (500) (333) 1,667 2,500 (500) 2,500 (500) (333) 1,667 2,500 (500) (333) 1,667 Expenses other than Depreciation Depreciation 800 800 (333) 510 EBIT 1,667 EBIT After Taxes (290) 1,333 1,333 1,333 1,333 Add back: Depreciation Free Cash Flow (After) 58 333 333 333 333 (1,432) 1,667 1,667 1,667 1,667 28 round to $ 29 *Tax OUTFLOW if Gain 30 *Tax INFLOW if loss ** EBIT * (1-tax rate) 32 *** difference between FCF before new equip, and FCF after Part 3: Incremental*** cash flows (1,432) 527 527 527 527 31 PV of Incremental Cash Flows: Cumulative Cash for Payback: Cumulative PV for Disc. Payback: 33 34 35 NPV: