Year Cost of equipment Raw Materials Initial Investment Units sold Price per unit Revenues Variable costs fixed costs depreciation EBIT (taxes) Income after tax Depreciation Annual After-tax Cash Flow Salvage value Tax Salvage value after tax Recovery of Raw Materials Terminal Cash flow 0 $930,000 $70,000 $1,000,000 Delicious Snacks Analysis 2 3 1 $ $ $ $ $ $ $ $ $ $ 1,500,000 1.00 1,500,000 1,050,000 500,000 186,000 (236,000) (82,600) (153,400) 186,000 32,600 $ $ $ $ $ $ $ $ $ $ 1,755,000 1.03 1,807,650 1,265,355 500,000 297,600 (255,305) (89,357) (165,948) 297,600 131,652 $ $ $ $ $ $ $ $ $ $ 2,053,350 1.06 2,178,399 1,524,879 500,000 178,560 (25,040) (8,764) (16,276) 178,560 162,284 s Analysis 4 $ $ $ $ $ $ $ $ $ $ 2,299,752 1.09 2,513,001 1,759,101 500,000 107,136 146,764 51,368 95,397 107,136 202,533 5 $ $ $ $ $ $ $ $ $ $ 2,575,722 1.13 2,898,998 2,029,299 500,000 107,136 262,563 91,897 170,666 107,136 277,802 6 $ $ $ $ $ $ $ $ $ $ 2,756,023 1.16 3,194,986 2,236,490 500,000 53,568 404,928 141,725 263,203 53,568 316,771 7 $ $ $ $ $ $ $ $ $ $ 2,948,944 1.19 3,521,194 2,464,836 500,000 556,358 194,725 361,633 361,633 $ $ $ $ $ 200,000 70,000 130,000 70,000 200,000 Year Cost of equipment Raw Materials Initial Investment 0 ($930,000) ($70,000) ($1,000,000) Price per package Price increase Sales growth Sales quantity Sales revenue Variables cost (70% of sales ) Depreciation rate Depreciation Fixed cost Profit before tax Tax (35%) Profit after tax Add back depreciation Operationg cash flow (OCF) Delicious Snacks Analysis 2 3 1 $1.00 1,500,000 $1,500,000 $1,050,000 20% $186,000 $500,000 -$236,000 -$82,600 -$153,400 $186,000 $32,600 $1.03 3% 17% 1,755,000 $1,807,650 #NAME? 32% $297,600 $500,000 -$255,305 -$89,357 -$165,948 $297,600 $131,652 $1.06 3% 17% 2,053,350 $2,178,399 #NAME? 19.20% $178,560 $500,000 #NAME? #NAME? #NAME? $178,560 #NAME? Salvage value at the end year 7 Tax (35%) Salvage value after tax Terminal cash flow NPV Analisys Cash flow Cumulative cash inflow Discount factor Discounted cash flow Cumulative discounted cash inflow Payback Period Discounted Payback Net Present Value (NPV) Profitability Index (PI) Internal Rate of Return (IRR) MIRR ($1,000,000) $32,600 $131,652 #NAME? $32,600 $164,252 $326,536 0.91743 0.84168 0.77128 ($1,000,000) $ 29,908.22 $ 110,808.64 #NAME? $ 29,908.22 $ 140,716.86 $ 265,883.12 $86,174.10 1.086 10.84% 10.29% Analysis MACRS T 4 5 6 7 Year 1 2 3 4 5 6 7 8 $70,000 $1.09 3% 12% 2,299,752 $2,513,001 #NAME? 11.52% $107,136 $500,000 #NAME? #NAME? #NAME? $107,136 #NAME? $1.13 3% 12% 2,575,722 $2,898,998 #NAME? 11.52% $107,136 $500,000 #NAME? #NAME? #NAME? $107,136 #NAME? $1.16 3% 7% 2,756,023 $3,194,986 #NAME? 5.76% $53,568 $500,000 #NAME? #NAME? #NAME? $53,568 #NAME? $1.19 3% 7% 2,948,944 $3,521,194 #NAME? $0 $500,000 #NAME? #NAME? #NAME? $0 #NAME? $200,000 $70,000 $130,000 $200,000 #NAME? #NAME? 0.70843 #NAME? #NAME? #NAME? #NAME? 0.64993 #NAME? #NAME? #NAME? #NAME? 0.59627 #NAME? $ #NAME? $561,633 #NAME? 0.54703 307,229.99 #NAME? Cost of Capital Tax Rate MACRS Tables 5-Year 7-Year 20.00% 14.29% 32.00% 24.49% 19.20% 17.49% 11.52% 12.49% 11.52% 8.93% 5.76% 8.92% 8.93% 4.46% 9% 35% CHAPTER 12: CAPITAL BUDGETING 1. Delicious Snacks, Inc. is considering adding a new line of candies to its current product line. The company already paid $300,000 for a marketing research study that provided evidence about the demand for this product at this time. The new line will require an additional investment of $70,000 in raw materials to produce the candies. The project's life is 7 years and the firm estimates sales of 1,500,000 packages at a price of $1 per unit the first year; but this volume is expected to grow at 17% for the next two years, 12% for the following two years, and finally at 7% for the last two years of the project. The price per unit is expected to grow at the historical average rate of inflation of 3%. The variable costs will be 70% of sales and the fixed costs will be $500,000. The equipment required to produce the candies will cost $900,000, and will require an additional $30,000 to have it delivered and installed. This equipment has an expected useful life of 7 years and will be depreciated using the MACRS 5-year class life. After 7 years, the equipment can be sold at a price of $200,000. The cost of capital is 9% and the firm's marginal tax rate is 35%. a) Calculate the initial investment, annual after-tax cash flows for each year, and the terminal cash flow. b) Determine the payback period, discounted payback period, NPV, PI, and IRR of the new line of candies. Should the firm accept or reject the project? c) The firm is considering three scenarios for the new line of cookies and bars. Under the best, base, and worst case scenario the firm will sell 1,200,000, 1,500,000, and 1,700,000 packages the first year with the same expected growth rates in units and price described in the problem. Re-examine the decision criteria in part (b) under each of these scenarios. MACRS tables Year 5-Year 7-year 1 20% 14.29% 2 32% 24.49% 3 19.2% 17.49% 4 11.52% 12.49% 5 11.52% 8.93% 6 5.76% 8.92% 7 8.93% 8 4.46% 71