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B E F G H 0 1 2 3 4 12 13 Investment Outlays at Time = 0 14 CAPEX Equipment = Cost (1-T) ANOWC Additional net operating working capital needed Operating Cash Flows Over the Project's 15 16 Life (Time = 1-4) 17 Unit sales -$900 -100 2,720 2,640 2,515 2,430 18 Sales price 19 Variable cost per unit 20 Sales revenues = Units x Price $2.00 $2.00 $2.00 $2.00 $1.0196 $1.0404 $1.0457 $1.1973 $5,440 $5,280 $5,030 $4,860 21 Variable costs = Units × Cost/unit 2,773 2,747 2,630 2,909 22 Fixed operating costs except depr'n 2,000 2,000 2,000 2,000 23 Depreciation: 100% Bonus Depreciation in Year 0 0 0 0 0 24 Total operating costs $4,773 $4,747 $4,630 $4,909 25 EBIT (or Operating income) $667 $533 $400 -$49 26 Taxes on operating income 25% 167 133 100 -12 27 EBIT (1-T) After-tax project operating income $500 $400 $300 -$37 28 Add back depreciation 0 0 0 0 29 EBIT (1-T)+ Depreciation $500 $400 $300 -$37 30 Terminal Cash Flows at Time = 4 31 Salvage value (taxed as ordinary income) 32 Tax on salvage value = 0.25x (SV - BV of equipment at t=4) 33 After-tax salvage value 34 ANOWC = Recovery of net operating working capital Project free cash flows = EBIT(1-T) + DEP 35 36 - CAPEX-ANOWC 50 50 13 37 100 -$1,000 $500 $400 $300 $100 37 Alternative depreciation Straight line 2 3 4 38 Cost: $1,200 Rate 25% 25% 25% 25% 39 40 Project Evaluation @ WACC= Depreciation 10% $300 $300 $300 $300 41 Bonus Depreciation Formulas Straight line 42 NPV $78.82 =NPV(D40,F35:135)+E35 $16.56 43 IRR 14.489% =IRR(E35:135) 10.700% 44 MIRR 12.106% =MIRR(E35:135,D40, D40) 10.349% 45 Payback 2.33 =G12+(-E35-F35-G35)/H35 2.67

B E F G H 0 1 2 3 4 12 13 Investment Outlays at Time = 0 14 CAPEX Equipment = Cost (1-T) ANOWC Additional net operating working capital needed Operating Cash Flows Over the Project's 15 16 Life (Time = 1-4) 17 Unit sales -$900 -100 2,720 2,640 2,515 2,430 18 Sales price 19 Variable cost per unit 20 Sales revenues = Units x Price $2.00 $2.00 $2.00 $2.00 $1.0196 $1.0404 $1.0457 $1.1973 $5,440 $5,280 $5,030 $4,860 21 Variable costs = Units × Cost/unit 2,773 2,747 2,630 2,909 22 Fixed operating costs except depr'n 2,000 2,000 2,000 2,000 23 Depreciation: 100% Bonus Depreciation in Year 0 0 0 0 0 24 Total operating costs $4,773 $4,747 $4,630 $4,909 25 EBIT (or Operating income) $667 $533 $400 -$49 26 Taxes on operating income 25% 167 133 100 -12 27 EBIT (1-T) After-tax project operating income $500 $400 $300 -$37 28 Add back depreciation 0 0 0 0 29 EBIT (1-T)+ Depreciation $500 $400 $300 -$37 30 Terminal Cash Flows at Time = 4 31 Salvage value (taxed as ordinary income) 32 Tax on salvage value = 0.25x (SV - BV of equipment at t=4) 33 After-tax salvage value 34 ANOWC = Recovery of net operating working capital Project free cash flows = EBIT(1-T) + DEP 35 36 - CAPEX-ANOWC 50 50 13 37 100 -$1,000 $500 $400 $300 $100 37 Alternative depreciation Straight line 2 3 4 38 Cost: $1,200 Rate 25% 25% 25% 25% 39 40 Project Evaluation @ WACC= Depreciation 10% $300 $300 $300 $300 41 Bonus Depreciation Formulas Straight line 42 NPV $78.82 =NPV(D40,F35:135)+E35 $16.56 43 IRR 14.489% =IRR(E35:135) 10.700% 44 MIRR 12.106% =MIRR(E35:135,D40, D40) 10.349% 45 Payback 2.33 =G12+(-E35-F35-G35)/H35 2.67

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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12-1. Operating cash flows rather than accounting income are listed in Table 12.1. Why do we focus on cash flows as opposed to net income in capital budgeting?

B E F G H 0 1 2 3 4 12 13 Investment Outlays at Time = 0 14 CAPEX Equipment = Cost (1-T) ANOWC Additional net operating working capital needed Operating Cash Flows Over the Project's 15 16 Life (Time = 1-4) 17 Unit sales -$900 -100 2,720 2,640 2,515 2,430 18 Sales price 19 Variable cost per unit 20 Sales revenues = Units x Price $2.00 $2.00 $2.00 $2.00 $1.0196 $1.0404 $1.0457 $1.1973 $5,440 $5,280 $5,030 $4,860 21 Variable costs = Units × Cost/unit 2,773 2,747 2,630 2,909 22 Fixed operating costs except depr'n 2,000 2,000 2,000 2,000 23 Depreciation: 100% Bonus Depreciation in Year 0 0 0 0 0 24 Total operating costs $4,773 $4,747 $4,630 $4,909 25 EBIT (or Operating income) $667 $533 $400 -$49 26 Taxes on operating income 25% 167 133 100 -12 27 EBIT (1-T) After-tax project operating income $500 $400 $300 -$37 28 Add back depreciation 0 0 0 0 29 EBIT (1-T)+ Depreciation $500 $400 $300 -$37 30 Terminal Cash Flows at Time = 4 31 Salvage value (taxed as ordinary income) 32 Tax on salvage value = 0.25x (SV - BV of equipment at t=4) 33 After-tax salvage value 34 ANOWC = Recovery of net operating working capital Project free cash flows = EBIT(1-T) + DEP 35 36 - CAPEX-ANOWC 50 50 13 37 100 -$1,000 $500 $400 $300 $100 37 Alternative depreciation Straight line 2 3 4 38 Cost: $1,200 Rate 25% 25% 25% 25% 39 40 Project Evaluation @ WACC= Depreciation 10% $300 $300 $300 $300 41 Bonus Depreciation Formulas Straight line 42 NPV $78.82 =NPV(D40,F35:135)+E35 $16.56 43 IRR 14.489% =IRR(E35:135) 10.700% 44 MIRR 12.106% =MIRR(E35:135,D40, D40) 10.349% 45 Payback 2.33 =G12+(-E35-F35-G35)/H35 2.67
Transcribed Image Text:B E F G H 0 1 2 3 4 12 13 Investment Outlays at Time = 0 14 CAPEX Equipment = Cost (1-T) ANOWC Additional net operating working capital needed Operating Cash Flows Over the Project's 15 16 Life (Time = 1-4) 17 Unit sales -$900 -100 2,720 2,640 2,515 2,430 18 Sales price 19 Variable cost per unit 20 Sales revenues = Units x Price $2.00 $2.00 $2.00 $2.00 $1.0196 $1.0404 $1.0457 $1.1973 $5,440 $5,280 $5,030 $4,860 21 Variable costs = Units × Cost/unit 2,773 2,747 2,630 2,909 22 Fixed operating costs except depr'n 2,000 2,000 2,000 2,000 23 Depreciation: 100% Bonus Depreciation in Year 0 0 0 0 0 24 Total operating costs $4,773 $4,747 $4,630 $4,909 25 EBIT (or Operating income) $667 $533 $400 -$49 26 Taxes on operating income 25% 167 133 100 -12 27 EBIT (1-T) After-tax project operating income $500 $400 $300 -$37 28 Add back depreciation 0 0 0 0 29 EBIT (1-T)+ Depreciation $500 $400 $300 -$37 30 Terminal Cash Flows at Time = 4 31 Salvage value (taxed as ordinary income) 32 Tax on salvage value = 0.25x (SV - BV of equipment at t=4) 33 After-tax salvage value 34 ANOWC = Recovery of net operating working capital Project free cash flows = EBIT(1-T) + DEP 35 36 - CAPEX-ANOWC 50 50 13 37 100 -$1,000 $500 $400 $300 $100 37 Alternative depreciation Straight line 2 3 4 38 Cost: $1,200 Rate 25% 25% 25% 25% 39 40 Project Evaluation @ WACC= Depreciation 10% $300 $300 $300 $300 41 Bonus Depreciation Formulas Straight line 42 NPV $78.82 =NPV(D40,F35:135)+E35 $16.56 43 IRR 14.489% =IRR(E35:135) 10.700% 44 MIRR 12.106% =MIRR(E35:135,D40, D40) 10.349% 45 Payback 2.33 =G12+(-E35-F35-G35)/H35 2.67
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