Ross, Westerfield, Jordan, and Roberts' Spreadsheet M
Fundamentals of Corporate Finance, 8th Canadian edit
by Brad Jordan and Joe Smolira
Version 10.0
Chapter 10
In these spreadsheets, you will learn how to u
Naming cells
SLN
VDB
Solver
The following conventions are used in these sp
1) Given data in blue
2) Calculations in red
NOTE: Some functions used in these spreadsheets may
the "Analysis ToolPak" or "Solver Add-In" be installed i
To install these, click on the File tab
then "Excel Options," "Add-Ins" and select
"Go." Check "Analysis ToolPak" and
"Solver Add-In," then click "OK."
rts' Spreadsheet Master
, 8th Canadian edition
l learn how to use the following Excel functions:
used in these spreadsheets:
e spreadsheets may require that
dd-In" be installed in Excel.
Chapter 10 - Section 3
Pro Forma Financial Statements and Cash Flows
Because capital budgeting requires numerous repetitive cash flows, it is an ideal applicatio
should do few or no calculations on your own, but rather let Excel do the calculations for yo
for the project:
Cans sold per year:
Price per can:
Variable cost per can:
Required return:
Fixed costs per year:
Manufacturing equipment:
Project life (years):
Initial net working capital:
Tax rate:
$
$
$
$
$
50,000
4.00
2.50
20%
12,000
90,000
3
20,000
34%
RWJ Excel Tip
In a problem with a number of different variables, it can be advantageous to name the cell
the Formula bar in the name bar and you will see the name "Units." We entered the name
from this cell later, we can type in the name of the variable instead of referencing the cell.
we used in this cell is Units * Price_per_unit. When naming cells, you should keep the name
name, so we used an underscore instead of the space in Price_per_unit.
With these numbers, we can prepare the pro forma income statement, which will be:
Sales
Variable costs
Fixed costs
Depreciation
EBIT
Taxes (34%)
Net income
$
$
200,000
125,000
12,000
30,000
33,000
11,220
21,780
RWJ Excel Tip
To calculate the depreciation each year for straight-line depreciation, we can divide the ini
we have done here. The SLN we used in this case looks like this:
The inputs are Cost, which is the initial cost, Salvage, which is the salvage value, and Life,
cost by the life of the equipment in the cell rather than use this particular function, but it is
To calculate the AAR, we need the average investment in assets each year. The total inves
Year
0
Net working capital
Net fixed assets
Total investment
$
$
20,000 $
90,000
110,000 $
20,000
60,000
80,000
So, the average assets are:
Average assets:
65,000
Now, we can calculate the operating cash flow each year, which will be:
EBIT
+ Depreciation
- Taxes
Operating cash flow
33,000
30,000
11,220
51,780
So, the total cash flow for each year of the project will be:
Year
0
Operating cash flow
Changes in NWC
Capital spending
Total project cash flow
$
$
1
$
51,780
(20,000)
(90,000)
(110,000) $
51,780
Given these cash flows, we can now calculate the NPV, IRR, and AAR of the project, which
NPV
IRR
AAR
10,647.69
25.76%
33.51%
sh Flows
ws, it is an ideal application for Excel. When doing a capital budgeting problem, as in most Excel use
l do the calculations for you. We will begin with the shark attractant project. We have the following p
ntageous to name the cells. Click on the input cell for the number of cans sold per year, and look to
s." We entered the name in the name bar to name the input in this cell. Whenever we want to use t
ad of referencing the cell. For example, if you look at the sales calculation below, you will see that th
you should keep the names short but understandable. In addition, Excel does not allow spaces in th
r_unit.
ment, which will be:
ion, we can divide the initial cost by the life of the equipment, or we can use the built-in Excel func
e salvage value, and Life, which is the life of the asset. In general, we usually find it easier just to di
articular function, but it is available if you prefer.
each year. The total investment each year will be:
Year
2
$
3
20,000 $
30,000
50,000 $
20,000
20,000
Year
2
51,780 $
$
51,780
20,000
51,780 $
71,780
AAR of the project, which are:
g problem, as in most Excel uses, you
project. We have the following projections
cans sold per year, and look to the left of
ell. Whenever we want to use the input
ation below, you will see that the formula
cel does not allow spaces in the variable
e can use the built-in Excel function SLN as
e usually find it easier just to divide the
Chapter 10 - Section 4
More on Project Cash Flow
In practice, most assets are depreciated on a MACRS schedule for tax purposes. The three-, fi
Year
1
2
3
4
5
6
7
8
3-year
33.33%
44.45%
14.81%
7.41%
Property Class
5- year
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%
7-year
14.29%
24.49%
17.49%
12.49%
8.93%
8.92%
8.93%
4.46%
For example, suppose we have an asset that falls in the five-year MACRS classification and th
Initial cost:
12,000
The depreciation for each year will be:
Year
1
2
3
4
5
6
MACRS
percentage
Depreciation
20.00% $
2,400.00
32.00%
3,840.00
19.20%
2,304.00
11.52%
1,382.40
11.52%
1,382.40
5.76%
691.20
100.00% $
12,000.00
To find the book value of the asset, we subtract depreciation each year from the beginning b
Year
1
2
3
4
Beginning
Ending
book value
Depreciation
book value
$
12,000 $
2,400.00 $
9,600.00
9,600.00
3,840.00
5,760.00
5,760.00
2,304.00
3,456.00
3,456.00
1,382.40
2,073.60
5
6
2,073.60
691.20
1,382.40
691.20
691.20
-
When the asset is sold, taxes will be paid if the asset is sold for more than book value, or a ta
calculate the taxes on the sale of the asset is (Book value - Market value)(Tax rate). Suppose
Pretax salvage value:
Tax rate:
3,000
34%
The aftertax salvage value, and therefore net cash flow from selling the asset at the end of th
Pretax salvage value:
Taxes on sale:
Aftertax salvage value:
$
$
3,000.00
(1,020.00)
1,980.00
The Majestic Mulch and Compost Company (MMCC)
The MMCC capital budgeting problem is a more in-depth analysis. As before, we want to put a
entering the data in rows for each variable, we could enter the data in columns as well. The in
Year
Units sales
Price
NWC to start
NWC % of sales
Variable cost
Fixed costs
Equipment
MACRS
Pretax salvage
Tax rate
Required return
1
$
$
$
$
$
3,000
120 $
20,000
15%
60
25,000
800,000
14.29%
20%
34%
15%
3
5,000
120 $
24.49%
6,000
120
17.49%
We will calculate the operating cash flow first, which we can calculate as net income plus dep
year will be:
Pro Forma Incom
Year
Revenues
Variable costs
Fixed costs
Depreciation
EBIT
1
360,000.00 $
180,000.00
25,000.00
114,320.00
40,680.00 $
2
600,000.00 $
300,000.00
25,000.00
195,920.00
79,080.00 $
3
720,000.00
360,000.00
25,000.00
139,920.00
195,080.00
Taxes (34%)
Net income
+ Depreciation
OCF
$
$
13,831.20
26,848.80 $
114,320.00
141,168.80 $
26,887.20
52,192.80 $
195,920.00
248,112.80 $
66,327.20
128,752.80
139,920.00
268,672.80
RWJ Excel Tip
Notice that in the income statements, we were careful to use absolute references in the varia
equations to calculate the net income during the first year, we simple copied and pasted the
Next, we will calculate the change in net working capital. One way to do this is to calculate th
to remember that the net working capital at the end of the project will be zero. So, the net wo
Year
Initial NWC
Ending NWC
NWC cash flow
0
(20,000) $
(20,000) $
1
20,000.00 $
54,000.00
(34,000.00) $
2
54,000.00
90,000.00
(36,000.00)
To find the aftertax salvage value, we need to calculate the taxes. We get:
Pretax salvage value:
Taxes on sale:
Aftertax salvage value:
$
$
160,000.00
(54,400.00)
105,600.00
So, the total cash flows for each year of the project are:
Pr
Year
OCF
Change in NWC
Capital spending
Total cash flow
0
$
$
$
$
(20,000)
(800,000)
(820,000) $
Finally, the NPV and IRR of the project are:
NPV:
IRR:
65,487.70
17.24%
A Note on MACRS Depreciation
1
141,168.80 $
(34,000.00)
2
248,112.80
(36,000.00)
107,168.80 $
212,112.80
There are actually six MACRS schedules, three-, five-, seven-, 10-, 15-, and 20-year schedules
declining balance method, and switching to straight-line depreciation when it is more advanta
when calculating the double declining balance depreciation amount, while the 15- and 20-yea
used to construct a MACRS table. Below, we have constructed a MACRS table with all six sche
Equipment L
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3
33.33%
44.44%
14.81%
7.41%
5
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%
RWJ Excel Tip
To construct the MACRS table, we used the variable declining balance (VDB) function. Constru
see what we entered for the second year of the three-year MACRS schedule.
Cost is the cost of the equipment. In this case, we entered one in order to get the answers as
zero. Life is the life of the asset. Since we have a table here, we entered the column as a float
down the table was well as across. The Start_period is the starting period for which we want t
subtracted 1/2. To calculate the End_period, we used the MIN function. This function will retur
we could have taken the next year minus one-half, but this would not work for the last year. N
year. So, for the first year, we eliminated the MIN function. Finally, the Factor is not shown on
factor of two for the three-, five-, seven-, and 10-year schedules and a factor of 1.5 for the 15
Finally, note that the MACRS schedule is slightly different from the table presented in the text
the IRS publishes a MACRS schedule, which is the schedule we used in the textbook. However
by the IRS. If you do so, you will get the table above, not the table in the textbook (or the tab
calculations.
tax purposes. The three-, five-, and seven-year MACRS schedules are:
MACRS classification and the initial cost is:
year from the beginning book value. The book value of this asset each year will be:
re than book value, or a tax rebate will be given if the asset is sold for less than book value. An easy w
value)(Tax rate). Suppose the pretax salvage value of the asset and the tax rate are:
g the asset at the end of the project (Year 6 in this case) will be:
As before, we want to put all inputs in a separate cell and have Excel handle all the calculations. While
a in columns as well. The input information for the MMCC line of power mulching tools is:
4
$
5
6,500
110 $
12.49%
6,000
110 $
5,000
110 $
4,000
110
8.93%
8.93%
8.93%
ate as net income plus depreciation. So, the pro forma income statements each
Pro Forma Income
4
$ 715,000.00 $
390,000.00
25,000.00
99,920.00
$ 200,080.00 $
Statements
5
660,000.00 $
360,000.00
25,000.00
71,440.00
203,560.00 $
6
550,000.00 $
300,000.00
25,000.00
71,440.00
153,560.00 $
7
440,000.00
240,000.00
25,000.00
71,440.00
103,560.00
$
$
68,027.20
132,052.80 $
99,920.00
231,972.80 $
69,210.40
134,349.60 $
71,440.00
205,789.60 $
52,210.40
101,349.60 $
71,440.00
172,789.60 $
35,210.40
68,349.60
71,440.00
139,789.60
ute references in the variable costs, fixed costs, depreciation, and tax cells. That way, once we entere
ple copied and pasted the year 1 net income column to the rest of the years.
to do this is to calculate the difference between the beginning and ending net working capital. We also
will be zero. So, the net working capital requirements each year are:
$
$
3
90,000.00 $
108,000.00
(18,000.00) $
4
108,000.00 $
107,250.00
750.00 $
5
107,250.00 $
99,000.00
8,250.00 $
6
99,000.00
82,500.00
16,500.00
Project Cash Flows
3
4
268,672.80 $ 231,972.80 $
(18,000.00)
750.00
5
205,789.60 $
8,250.00
6
172,789.60
16,500.00
250,672.80 $
214,039.60 $
189,289.60
232,722.80 $
15-, and 20-year schedules. The MACRS schedule is calculated using the depreciation according to the
on when it is more advantageous. The three-, five-, seven-, and 10-year schedules use a factor of 2 (20
t, while the 15- and 20-year schedules use a factor of 1.5 (150%). Excel has a function, VDB, which can
ACRS table with all six schedules.
Equipment Life (Years)
7
14.29%
24.49%
17.49%
12.49%
8.92%
8.92%
8.92%
4.46%
10
10.00%
18.00%
14.40%
11.52%
9.22%
7.37%
6.55%
6.55%
6.55%
6.55%
3.28%
15
5.00%
9.50%
8.55%
7.70%
6.93%
6.23%
5.90%
5.90%
6.02%
6.02%
6.02%
6.02%
6.02%
6.02%
6.02%
3.01%
20
3.75%
7.22%
6.68%
6.18%
5.71%
5.28%
4.89%
4.52%
4.46%
4.46%
4.46%
4.54%
4.54%
4.54%
4.54%
4.54%
4.54%
4.54%
4.54%
4.54%
2.27%
nce (VDB) function. Constructing the MACRS table is tricky because of the half-year convention. Below
schedule.
rder to get the answers as a percentage rather than a dollar amount. Salvage is the salvage value, wh
tered the column as a floating input and locked the row. This allows us to copy and paste the formula f
period for which we want to calculate the depreciation. With the half-year convention, we used the yea
ion. This function will return the lesser of the next year minus one-half, or the life of the asset. In most
not work for the last year. Notice that this MIN function will not work for the first year since there is no p
the Factor is not shown on the picture above since Excel scrolls through the inputs in this case. We use
nd a factor of 1.5 for the 15- and 20-year schedules.
table presented in the textbook for the 6th and 8th year of the seven-year MACRS schedule. The reaso
d in the textbook. However, you are allowed to calculate the schedule on your own based on the rules
in the textbook (or the table published by the IRS!). In the future, we will use the table in the textbook
ch year will be:
or less than book value. An easy way to
the tax rate are:
handle all the calculations. While we are
er mulching tools is:
8
$
3,000
110
4.45%
ments each
8
330,000.00
180,000.00
25,000.00
35,600.00
89,400.00
$
$
30,396.00
59,004.00
35,600.00
94,604.00
ax cells. That way, once we entered all the
he years.
nding net working capital. We also need
7
82,500.00 $
66,000.00
16,500.00 $
8
66,000.00
66,000.00
7
139,789.60 $
16,500.00
156,289.60 $
8
94,604.00
66,000.00
105,600.00
266,204.00
$
$
the depreciation according to the double
ear schedules use a factor of 2 (200%)
xcel has a function, VDB, which can be
f the half-year convention. Below you will
. Salvage is the salvage value, which is
us to copy and paste the formula further
-year convention, we used the year and
alf, or the life of the asset. In most years
for the first year since there is no prior
ugh the inputs in this case. We used a
n-year MACRS schedule. The reason is that
e on your own based on the rules outlined
will use the table in the textbook for our
Chapter 10 - Section 7
Some Special Cases of Discounted Cash Flow Analysis
Setting a Bid Price
In the chapter, when we explained the process for setting a bid price, we assumed that the
the NPV function is much simpler. With MACRS depreciation, even if sales are the same eve
for just about any variable. Suppose we are bidding on the following project. The contract w
schedule. What is the minimum bid price we could submit?
Equipment
Pretax salvage value
Units per year
Price per unit
VC as a percentage of sales
Fixed costs
MACRS Year 1
MACRS Year 2
MACRS Year 3
MACRS Year 4
Immediate NWC
Tax rate
Required return
$
$
$
$
3,300,000
75,000
125,000
22.64
45%
425,000
33.33%
44.44%
14.82%
7.41%
80,000
35%
10%
We entered a price in the appropriate cell above. As we will show later, it does not really m
project with our hypothetical price. This will be:
Year
Revenues
Variable costs
Fixed costs
Depreciation
EBIT
Taxes (35%)
Net income
+ Depreciation
OCF
$
$
$
1
2,829,542
1,273,294
425,000
1,099,890
31,358
10,975
20,383
1,099,890
1,120,273
Pro Forma Income Statements
2
3
$
2,829,542 $
2,829,542
1,273,294
1,273,294
425,000
425,000
1,466,520
489,060
$
(335,272) $
642,188
(117,345)
224,766
$
(217,927) $
417,422
1,466,520
489,060
$
1,248,593 $
906,482
To find the aftertax salvage value, we need to calculate the taxes. We get:
Pretax salvage value:
Taxes on sale:
Aftertax salvage value:
$
$
75,000.00
(26,250.00)
48,750.00
The total cash flows for each year of the project are:
Year
OCF
Change in NWC
Capital spending
Total cash flow
0
$
$
$
$
(80,000)
(3,300,000)
(3,380,000) $
Project Cash Flows
1
2
1,120,273 $
1,248,593
1,120,273 $
1,248,593
Finally, the NPV of the project at this unit price is:
NPV:
(0.00)
The minimum bid price is the price at which the NPV of the project is zero. We can use Solv
RWJ Excel Tip
To use Solver, go to the Data tab, then click Solver. The inputs we used for this problem are
As you see, with Solver you first enter the target cell you would like to set to a specific valu
NPV, we chose to set the NPV cell equal to a value of zero. Next, we select the cell we wou
we changed the unit price cell. This is why the original value we entered for the unit price i
used Solver, we restored the original value. On the next worksheet, you can see the answe
Minimum bid price:
22.64
We restored the original unit price so you could use Solver on this problem for practice.
NOTE: There is a bug in Solver that will occur occasionally. In some cases, Solver will not la
unexpected internal error or available memory was exhausted" pop up. In this case, the so
1) Go to the Office button on the top left, click Excel options, choose Add-Ins, select E
2) Uncheck the Solver add-in and click OK.
3) Go to the Office button on the top left, click Excel options, choose Add-Ins, select E
a repeat of Step 1.
4) Check the Solver add-in and select OK.
Example 10.4: Equivalent Annual Cost
To find the equivalent annual cost (EAC,) we find the net present value of the project, then
have two different options for a pollution control system, a filtration system or a precipitati
Equipment
Operating cost
Life (years)
Discount rate
Tax rate
Filtration
Precipitation
system
system
$
1,100,000 $
1,900,000
$
60,000 $
10,000
5
8
12%
34%
We can calculate the NPV of each project as:
Operating cost
Depreciation
EBIT
Tax
Net income
Income Statements
Filtration
Precipitation
system
system
$
60,000 $
10,000
220,000
237,500
$
(280,000) $
(247,500)
(95,200)
(84,150)
$
(184,800) $
(163,350)
So, using the bottom-up approach, the OCF for each alternative is:
OCF
35,200 $
74,150
Now, we can calculate the NPV of each project:
NPV
(973,112) $
(1,531,650)
Using the PMT function to find the EAC, we get:
EAC
($269,950.71)
($308,325.40)
In the final analysis, we should choose the system that is the least expensive, which is the
Flow Analysis
e, we assumed that the depreciation was straight-line. This assumption means that the math requir
sales are the same every year, the cash flows will be different each year. However, with Excel, we
g project. The contract will last for four years, and the equipment will be depreciated on a three-yea
ter, it does not really matter what price we entered. Next, we need to calculate the cash flows and N
ements
We get:
$
$
$
4
2,829,542
1,273,294
425,000
244,530
886,718
310,351
576,367
244,530
820,897
ash Flows
$
3
906,482 $
906,482 $
4
820,897
80,000
48,750
949,647
s zero. We can use Solver to find this unit price (and much more.)
sed for this problem are:
to set to a specific value, in this case, the NPV cell. Since the lowest bid price is the price that resul
e select the cell we would like to change in order to set the target cell equal to the value we chose. I
tered for the unit price is irrelevant: Solver will change the value when it solves the problem. Note th
you can see the answer report generated by Solver. In this case, the bid price that results in a zero
roblem for practice.
cases, Solver will not launch, or if you try to save one or more of the reports, you may see "Solver:
up. In this case, the solution is to uninstall Solver and re-install it. To do this:
choose Add-Ins, select Excel Add-Ins in the pulldown menu near the bottom of the box, and click on
hoose Add-Ins, select Excel Add-Ins in the pulldown menu near the bottom of the box, and click on G
lue of the project, then find the annuity that represents the annual cost based on the life of the proj
system or a precipitation system. The relevant numbers for each alternative are:
expensive, which is the filtration system.
ion means that the math required to solve
year. However, with Excel, we can solve
be depreciated on a three-year MACRS
o calculate the cash flows and NPV for the
bid price is the price that results in a zero
l equal to the value we chose. In this case,
n it solves the problem. Note that after we
e bid price that results in a zero NPV is:
e reports, you may see "Solver: An
do this:
ottom of the box, and click on Go.
ottom of the box, and click on Go. This is
ost based on the life of the project. We
ternative are:
Microsoft Excel 12.0 Answer Report
Worksheet: [Chapter 10.xlsx]Section 10.6
Report Created: 02/19/2012 5:35:12 PM
Target Cell (Value Of)
Cell
Name
$C$55 NPV: Project Cash Flows
Original Value Final Value
$
###
Adjustable Cells
Cell
Name
$D$11 Price per unit
Original Value Final Value
$
22.64
###
Constraints
NONE
Chapter 10 - Master it!
For this Master It! assignment, refer to the Conch Republic Electronics case at the end
case such as the price, variable cost, etc. on the next page. For this project, answer t
a.
What is the profitability index of the project?
b.
What is the IRR of the project?
c.
What is the NPV of the project?
d.
At what price would Conch Republic Electronics be indifferent to accepting the projec
e.
At what level of variable costs per unit would Conch Republic Electronics be indifferen
Electronics case at the end of Chapter 10. For your convenience, we have entered the relevant value
For this project, answer the following questions:
nt to accepting the project?
c Electronics be indifferent to accepting the project?
have entered the relevant values in the
Master it! Solution
Equipment
Pretax salvage value
R&D
Marketing study
$
$
$
$
Year 1
74,000
80,000
15,000
14.29%
Sales (units)
Sales of old PDA
Lost sales
Depreciation rate
Price
VC
FC
Price of old PDA
Price reduction
of old PDA
VC of old PDA
Tax rate
NWC percentage
Required return
Sales
New
Lost sales
Lost revenue
Net sales
VC
New
Lost sales
Total VC
Sales
VC
Fixed costs
Dep
EBT
Tax
NI
+Dep
21,500,000
4,100,000
750,000
200,000
$
$
$
$
Year 2
95,000
60,000
15,000
24.49%
360
155
4,700,000
290
$
$
35
120
35%
20%
12%
Year 1
Year 2
OCF
NWC
Beg
End
NWC CF
Net CF
Salvage
BV of equipment
Taxes
Salvage CF
Time
0
1
2
3
4
5
a.
Profitability index
b.
IRR
c.
NPV
d.
Minimum price
e.
Maximum VC
Cash flow
Year 3
125,000
17.49%
Year 3
Year 4
105,000
12.49%
Year 4
Year 5
80,000
8.93%
Year 5
