Problem: Calculate on the difference between FCF Do FCF Dont Do

Prepare a template of doing the project and then a second template of not doing the project

Assumptions change

If you dont do the project you will sell the land in Y0

Compare the two and calculate incremental NPV

Sunk costs

Ignore, not incremental

$50 spent two years ago, we are not getting back

Given Information:

2 year project

Capital required for P&E = $2500 in Y0

WC = $550 in Y1 and $600 in Y2. Total not incremental WC & required at beginning of the year

Salvage value of P&E at end of 2 years = $900

Depreciation in each of first 2 years = $1,000

Production is 1,000 units per year.

Assume revenue & costs are all incurred at the end of each year

Price = $2 / unit in Y1 and increases at a rate of 20%

Operating costs in Y1 = $400, Y2 = $500

Company owns land on which to build a plant which has a book value of $300. The current market value is $300 but it is expected to rise at an annual rate of 5%. The land will be sold after 2 years.

Company originally planned to start the project 2 years ago and spent $50 in planning, but shelved it.

Tax rate = 34%

Cost of capital = 15%

Tax on asset sale

Profit / loss = Sale Proceeds Book value

Book value = Purchase price accumulated depreciation

Suppose you bought equipment for $2,500, depreciated it for two years at $1,000 per year and sell it for $900 at the end of the second year

Purchase price = $2,500

Accumulated depreciation = $2,000

Book value = $2,500 2,000 = $500

Taxable profit in Y2 = $900 500 = $400

______________________________________

Include in template

Working Capital

Year 0,1,2

Revenue

Cash Costs

Depreciation of Equiptment

Profit/Loss from asset sale

Equiptment

Land

Taxable operating income

Tax on operating income

Net oper profit after tax

Depreciation of Equiptment

Profit/loss from asset sale

Equiptment

Land

Operating cash flow

Changes in working capital

Capital Expenditure

Cash Flow from asset sale

Equiptment

Land

Free Cash flow to all capital

Note: Working on this problem, posting on Chegg to check my answer.