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Would you invest in this company? (given the figures below) Why or why not? Base Case 1)Cash flows from fixed assets Year 0 1 2

Would you invest in this company? (given the figures below) Why or why not?

Base Case

1)Cash flows from fixed assets

Year 0 1 2 3 4 5

Equipment Cost -2E+06

Equipment Set-up cost -300000

Equipment Salvage Value 600000

Cash flow from assets -2E+06 0 0 0 0 600000

2)Cash flows from changes to operating capital

NOWC 10%Sales Value -250000 -270375 -292411 -316242 -342016

3) Cash flows from operations Year 0 1 2 3 4 5

Unit Sales/Year 25000 26250 27563 28941 30388

Projected price/Year 100 103 106 109 113

Projected Total sales value---1 2500000 2703750 2924106 3162420 3420157

Less: Variable cost/unit 60 63 66.15 69.458 72.93

Total Variable cost ---------2 -2E+06 -2E+06 -2E+06 -2E+06 -2E+06

Less: Fixed cost-------------3 -500000 -530000 -561800 -595508 -631238

Less: MACRS Depn.---------4 -328670 -563270 -402270 -287270 -205390 -205160 -205390 -102580

EBIT --------1+2+3+4 171330 -43270 136776 269499 367346

Tax at 35% EBIT -59966 0 -47872 -94325 -128571

EAT 111365 -43270 88905 175174 238775

Add Back Depreciation 328670 563270 402270 287270 205390

Operating cash flow 440035 520000 491175 462444 444165

Base Case NPV

Year 0 1 2 3 4 5

Cash flow from assets -2E+06 0 0 0 0

After tax salvage600000(1-35%) 390000

NOWC 10%Sales Value -250000 -270375 -292411 -316242 -342016

Recovery of NOWC 1471043

Operating cash flow 440035 520000 491175 462444 444165

Net annual cash flows -2E+06 190035 249625 198764 146202 1963192

PV F at WACC 10% 1 0.90909 0.82645 0.75131 0.68301 0.62092

PV at WACC at 10% -2E+06 172759 206302 149334 99858 1218988

NPV (Base Case) -452759

WORST Case Scenario

2)Cash flows from changes to operating capital

NOWC 10%Sales Value -250000 -252500 -255025 -257575 -260151

3) Cash flows from operations Year 0 1 2 3 4 5

Unit Sales/Year 25000 25000 25000 25000 25000

Projected price/Year 100 101 102 103 104

Projected Total sales value---1 2500000 2525000 2550250 2575753 2601510

Less: Variable cost/unit 60 63 66.15 69.458 72.93

Total Variable cost ---------2 -2E+06 -2E+06 -2E+06 -2E+06 -2E+06

Less: Fixed cost-------------3 -500000 -530000 -561800 -595508 -631238

Less: MACRS Depn.---------4 -328670 -563270 -402270 -287270 -205390

EBIT --------1+2+3+4 171330 -143270 -67570 -43463 -58378

Tax at 35% EBIT -59966 0 0 0 0

EAT 111365 -143270 -67570 -43463 -58378

Add Back Depreciation 328670 563270 402270 287270 205390

Operating cash flow 440035 420000 334700 243807 147012

Worst Case NPV

Year 0 1 2 3 4 5

Cash flow from assets -2E+06 0 0 0 0

After tax salvage600000(1-35%) 390000

NOWC 10%Sales Value -250000 -252500 -255025 -257575 -260151

Recovery of NOWC 1275251

Operating cash flow 440035 420000 334700 243807 147012

Net annual cash flows -2E+06 190035 167500 79675 -13768 1552112

PV F at WACC 10% 1 0.90909 0.82645 0.75131 0.68301 0.62092

PV at WACC at 10% -2E+06 172759 138430 59861 -9404 963740

NPV (Worst Case) -974615

BEST Case Scenario

2)Cash flows from changes to operating capital

NOWC 10%Sales Value -250000 -315000 -396900 -500094 -630118

3) Cash flows from operations Year 0 1 2 3 4 5

Unit Sales/Year 25000 30000 36000 43200 51840

Projected price/Year 100 105 110.25 115.76 121.55

Projected Total sales value---1 2500000 3150000 3969000 5000940 6301184

Less: Variable cost/unit 60 63 66.15 69.458 72.93

Total Variable cost ---------2 -2E+06 -2E+06 -2E+06 -3E+06 -4E+06

Less: Fixed cost-------------3 -500000 -530000 -561800 -595508 -631238

Less: MACRS Depn.---------4 -328670 -563270 -402270 -287270 -205390

EBIT --------1+2+3+4 171330 166730 623530 1117598 1683845

Tax at 35% EBIT -59966 -58356 -218236 -391159 -589346

EAT 111365 108375 405295 726439 1094499

Add Back Depreciation 328670 563270 402270 287270 205390

Operating cash flow 440035 671645 807565 1013709 1299889

Best Case NPV

Year 0 1 2 3 4 5

Cash flow from assets -2E+06 0 0 0 0

After tax salvage600000(1-35%) 390000

NOWC 10%Sales Value -250000 -315000 -396900 -500094 -630118

Recovery of NOWC 2092112

Operating cash flow 440035 671645 807565 1013709 1299889

Net annual cash flows -2E+06 190035 356645 410665 513615 3151883

PV F at WACC 10% 1 0.90909 0.82645 0.75131 0.68301 0.62092

PV at WACC at 10% -2E+06 172759 294748 308538 350806 1957072

NPV (Best Case) 783922

PV of depn. Tax shield lost Net NPV Prob.

NPV (Base Case) -452759 269059 -721819 50% -360909

NPV (Worst Case) -974615 269059 -1E+06 25% -310919

NPV (Best Case) 783922 269059 514863 25% 128716

Net Present Value -543112

Note:

PV of Depn. Tax -shield lost=

(205160/1.1^6)+(205390/1.1^7)+(102580/1.1^8)

269059

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Previous Question Next Question

Base Case
1)Cash flows from fixed assets
	Year 0	1	2	3	4	5
Equipment Cost	-2E+06
Equipment Set-up cost	-300000
Equipment Salvage Value						600000
Cash flow from assets	-2E+06	0	0	0	0	600000



2)Cash flows from changes to operating capital
NOWC 10%*Sales Value		-250000	-270375	-292411	-316242	-342016



3) Cash flows from operations	Year 0	1	2	3	4	5
Unit Sales/Year		25000	26250	27563	28941	30388
Projected price/Year		100	103	106	109	113
Projected Total sales value---1		2500000	2703750	2924106	3162420	3420157

Less: Variable cost/unit		60	63	66.15	69.458	72.93
Total Variable cost ---------2		-2E+06	-2E+06	-2E+06	-2E+06	-2E+06

Less: Fixed cost-------------3		-500000	-530000	-561800	-595508	-631238
Less: MACRS Depn.---------4		-328670	-563270	-402270	-287270	-205390	-205160	-205390	-102580
EBIT --------1+2+3+4		171330	-43270	136776	269499	367346
Tax at 35% *EBIT		-59966	0	-47872	-94325	-128571
EAT		111365	-43270	88905	175174	238775
Add Back Depreciation		328670	563270	402270	287270	205390
Operating cash flow		440035	520000	491175	462444	444165



Base Case NPV
	Year 0	1	2	3	4	5
Cash flow from assets	-2E+06	0	0	0	0
After tax salvage600000*(1-35%)						390000

NOWC 10%*Sales Value		-250000	-270375	-292411	-316242	-342016
Recovery of NOWC						1471043

Operating cash flow		440035	520000	491175	462444	444165

Net annual cash flows	-2E+06	190035	249625	198764	146202	1963192
PV F at WACC 10%	1	0.90909	0.82645	0.75131	0.68301	0.62092
PV at WACC at 10%	-2E+06	172759	206302	149334	99858	1218988
NPV (Base Case)	-452759

WORST Case Scenario
2)Cash flows from changes to operating capital
NOWC 10%*Sales Value		-250000	-252500	-255025	-257575	-260151



3) Cash flows from operations	Year 0	1	2	3	4	5
Unit Sales/Year		25000	25000	25000	25000	25000
Projected price/Year		100	101	102	103	104
Projected Total sales value---1		2500000	2525000	2550250	2575753	2601510




Less: Variable cost/unit		60	63	66.15	69.458	72.93
Total Variable cost ---------2		-2E+06	-2E+06	-2E+06	-2E+06	-2E+06

Less: Fixed cost-------------3		-500000	-530000	-561800	-595508	-631238
Less: MACRS Depn.---------4		-328670	-563270	-402270	-287270	-205390
EBIT --------1+2+3+4		171330	-143270	-67570	-43463	-58378
Tax at 35% *EBIT		-59966	0	0	0	0
EAT		111365	-143270	-67570	-43463	-58378
Add Back Depreciation		328670	563270	402270	287270	205390
Operating cash flow		440035	420000	334700	243807	147012



Worst Case NPV
	Year 0	1	2	3	4	5
Cash flow from assets	-2E+06	0	0	0	0
After tax salvage600000*(1-35%)						390000

NOWC 10%*Sales Value		-250000	-252500	-255025	-257575	-260151
Recovery of NOWC						1275251

Operating cash flow		440035	420000	334700	243807	147012

Net annual cash flows	-2E+06	190035	167500	79675	-13768	1552112
PV F at WACC 10%	1	0.90909	0.82645	0.75131	0.68301	0.62092
PV at WACC at 10%	-2E+06	172759	138430	59861	-9404	963740
NPV (Worst Case)	-974615


BEST Case Scenario
2)Cash flows from changes to operating capital
NOWC 10%*Sales Value		-250000	-315000	-396900	-500094	-630118



3) Cash flows from operations	Year 0	1	2	3	4	5
Unit Sales/Year		25000	30000	36000	43200	51840
Projected price/Year		100	105	110.25	115.76	121.55
Projected Total sales value---1		2500000	3150000	3969000	5000940	6301184




Less: Variable cost/unit		60	63	66.15	69.458	72.93
Total Variable cost ---------2		-2E+06	-2E+06	-2E+06	-3E+06	-4E+06

Less: Fixed cost-------------3		-500000	-530000	-561800	-595508	-631238
Less: MACRS Depn.---------4		-328670	-563270	-402270	-287270	-205390
EBIT --------1+2+3+4		171330	166730	623530	1117598	1683845
Tax at 35% *EBIT		-59966	-58356	-218236	-391159	-589346
EAT		111365	108375	405295	726439	1094499
Add Back Depreciation		328670	563270	402270	287270	205390
Operating cash flow		440035	671645	807565	1013709	1299889



Best Case NPV
	Year 0	1	2	3	4	5
Cash flow from assets	-2E+06	0	0	0	0
After tax salvage600000*(1-35%)						390000

NOWC 10%*Sales Value		-250000	-315000	-396900	-500094	-630118
Recovery of NOWC						2092112

Operating cash flow		440035	671645	807565	1013709	1299889

Net annual cash flows	-2E+06	190035	356645	410665	513615	3151883
PV F at WACC 10%	1	0.90909	0.82645	0.75131	0.68301	0.62092
PV at WACC at 10%	-2E+06	172759	294748	308538	350806	1957072
NPV (Best Case)	783922




		PV of depn. Tax shield lost	Net NPV	Prob.
NPV (Base Case)	-452759	269059	-721819	50%	-360909
NPV (Worst Case)	-974615	269059	-1E+06	25%	-310919
NPV (Best Case)	783922	269059	514863	25%	128716
Net Present Value					-543112



Note:
PV of Depn. Tax -shield lost=
(205160/1.1^6)+(205390/1.1^7)+(102580/1.1^8)
269059