Assignment 3 Question 1

Co = 2,500,000 t = 0

CF = 600,000, t=1,2,3,4,5,6

S = 350,000, t=6

R = 15%

1A) Payback period

Period Cash Flow Remaining

0 -2,500,000 -2,500,000
1 600,000 -1,900,000
2 600,000 -1,300,000
3 600,000 -700,000
4 600,000 -100,000
5 600,000 500,00
6 600,000 + 350,000 = 950,000 1,450,000

Payback occurs somewhere during Year 4.

Payback period = 4 + (100,000 / 600,000) * 12

Payback period = 4 + (0.16666667 * 12)

Payback period = 4 years, 2 months.

1B) Discounted Payback Period

Period Cash Flow Calculation PV (Cash Flow) Remaining

0 -2,500,000 - -2,500,000 -2,500,000
1 600,000 /(1.15) 521,739.1304 -1,978,260.87
2 600,000 /(1.15^2) 453,686.2004 -1,524,574.669
3 600,000 /(1.15^3) 394,509.4395 -1,130,064.930
4 600,000 /(1.15^4) 343,051.9474 -787,012.9826
5 600,000 /(1.15^5) 298,306.0412 -488,706.9411
6 950,000 /(1.15^6) 410,711.2161 -77,995.425

Since there is still -$77,995.43 remaining at the end of the life, there is no discount payback period.

1C) If Choo Choo’s cutoff period is five years, they would purchase the printer based on the payback
period but they would not purchase it based on the discounted payback period.
1D) Net Present Value

NPV = PV(inflows) + PV(outflows)

Inflows

CF= 600,000, t=1,2,3,4,5,6

S = 350,000, t=6

Outflows

Co= 2,500,000

PV(inflows)

PV(CF) = 600,000 [1 – (1 / (1 + r)^N)] / N

PV(CF) = 600,000 [1 – (1 / (1 + 0.15)^6)] / 0.15

PV(CF) = 2,270,689.616

PV(S) = 350,000 (1 + r)^N

PV(S) = 350,000 (1.15)^6

PV(S) = 151,314.6586

NPV= 2,270,689.616 + 151,314.6586 – 2,500,000

NPV = -77,995.72543

The NPV is -$77,995.73. It is negative, so the purchase of the printer should be rejected.

1E) Profitability Index

PI = PV(inflows) / PV(outflows)

PI = (2,270,689.616 + 151,314.6586) / 2,500,000

PI = 0.97

The profitability index is 0.97. Since it is less than 1, the printer should not be purchased.
1F) Internal Rate of Return

Use financial calculator

CF0= -2500000

CF1= 600000

CF2= 600000

CF3= 600000

CF4= 600000

CF5= 600000

CF6= 950000

COMP IRR = 13.89863770= 13.90%

1G) Check if IRR is where NPV = 0

NPV = PV(inflows) – PV(outflows) = 0

0 = {600,000[1-(1/(1+0.138986377)^6)]/0.135986377} + [350,000/(1+0.135986377)^6] – 2,500,000

0 = 2,339,691.384 + 160,308.6166 - -2,500,000

0=0

Yes, at IRR = 13.90%, the NPV = 0. Based on this criterion, the printer should not be purchased
because the IRR is less than the required rate of return (r = 15%)

1H) I would recommend that Choo Choo not purchase the printer

Assignment 3 Question 2

Capital rationing is when a firm has positive NPV projects but no means of financing them. There are two
types of capital rationing: soft and hard.

 Soft Capital Rationing: self-imposed budgeting in which it is determined internally how much
money each department will get in a period (such as an annual departmental budget).
 Hard Capital Rationing: “market imposed” rationing, meaning that no external forces in the
market are willing to assist with financing the positive NPV projects.

Capital rationing can affect the goal of maximizing shareholder equity because it tends to encourage
managers to take on projects that provide short term funds instead of focusing on the long term
benefits of rejected projects.
Assignment 3 Question 3

3A) Internal Rate of Return

INVESTMENT A

CF0= -100

CF1= 10

CF2= 30

CF3= 50

CF4= 70

COMP IRR = 16.62108753

INVESTMENT B

CF0= -1000

CF1= 50

CF2= 40

CF3= 30

CF4= 20

COMP IRR = 17.80474606

Investments A’s IRR is 16.62% and Investment B’s is 17.80%

3B) See Excel file

3C) See Excel file

3D) Conclusions at 17%

INVESTMENT A @ 17%

IRR = 16.62%

Reject – IRR is less than required rate

NPV = PV(inflows) – PV(outflows)

NPV = (10 / (1.17)) + (30 / (1.17^2)) + (50 / (1.17^3)) + (70 / (1.17^4)) – 100

NPV = 8.547008547 + 21.91540653 + 31.21852782 + 37.35550338 – 100

NPV = -0.963553723

Reject – NPV is less than 0

INVESTMENT B @ 17%

IRR = 17.80%

Accept – IRR is greater than the required rate of return

NPV = PV(inflows) – PV(outflows)

NPV = (50 / (1.17)) + (40/(1.17^2)) + (30 / (1.17^3)) + (20/(1.17^4)) – 100

NPV = 1.3597024

Accept – NPV is greater than 0

Yes, r=17% would lead us to the conclusion that we should reject Investment A and accept Investment
B

3E) Conclusion at r=10%

INVESTMENT A @ 10%

IRR = 16.62%

Accept – IRR is greater than the required rate

NPV = PV(inflows) – PV(outflows)

NPV = (10 / (1.1)) + (30 / (1.1^2)) + (50 / (1.1^3)) + (70 / (1.1^4)) – 100

NPV = 9.09090909 + 24.79338843 + 37.56574005 + 47.81094188 – 100

NPV = 19.2609795

Accept – NPV is greater than 0

INVESTMENT B @ 10%

IRR = 17.80%

Accept – IRR is greater than the required rate

NPV = PV(inflows) – PV(outflows)

NPV = (50 / (1.1)) + (40/(1.1^2)) + (30 / (1.1^3)) + (20/(1.1^4)) – 100

NPV = 14.712109

Accept – NPV is greater than 0

Yes, r=10% would lead us to conclude that both investments are acceptable

3F) Crossover Rate

Difference of Cash Flows

Period CFA – CFB Difference

0 -100 – (-100) 0
1 10 – 50 -40
2 30 – 40 -10
3 50 – 30 20
4 70 – 20 50

Use Financial Calculator

CF0 = 0

CF1 = -40

CF2 = -10

CF3 = 20

CF4 = 50

COMP IRR = 14.34049115%

The crossover rate is 14.34%

Assignment 3 Question 4

ATOCF using 4 approaches

Proforma Statement:

Sales 2,000,000
Variable Costs 1,500,000
Fixed Costs 150,000
Depreciation 190,000
EBIT 160,000
Interest 0
Taxable Income 160,000
Taxes 56,000
Net Income 104,000

NORMAL APPROACH

OCF = EBIT + Depreciation – Tax

OCF = 160,000 + 190,000 – 56,000

OCF = 294,000

BOTTOM UP APPROACH

OCF = Net Income + Depreciation

OCF = 104,000 + 190,000

OCF = 294,000

TOP DOWN APPROACH

OCF = Sales – Costs – Taxes

OCF = 2,000,000 – 1,500,000 – 56,000

OCF = 294,000

TAX SHIELD APPROACH

OCF = [(Sales – Costs) * (1-T)] + Depreciation Tax Shield

OCF = [(2,000,000 – 1,500,000) * (1 – 0.35)] + (190,000 * 0.35)

OCF = 294,000
Assignment 3 Question 5

Project A Project B
Co = 1,500, t= 0 Co = 5,000, t=0
CF = 800, t=1,2,3 CF= 1,500, t=1,2,3,4,5
R= 10%

5A) NPV of Projects

PROJECT A NPV

NPV = PV(inflows) – PV(outflows)

NPV = 800 [1 – (1 / (1 + 0.1)^3)] / 0.1 – 1,500

NPV = 1989.180154 – 1,500

NPV = 489.481593

NPV = 489.48

PROJECT B NPV

NPV = 1,500 [1 – (1 / (1 + 0.1)^5)] / 0.1 – 5,000

NPV = 5,686.180154 – 5,000

NPV = 686.180154

NPV = 686.18

5B) We should not use the NPV criteria in this case because the different life spans would result in an
inaccurate decision. Instead, we should use the Equivalent Annual Costs (in this case, Equivalent Annual
Benefit because they are both positive). Alternatively, we could use the Matching Life Multiples Method,
which is much more cumbersome.

5C) Equivalent Annual Benefit method

PVAF(A) = [1 – (1 / (1 + 0.1)^3)] / 0.1 = 2.486851991

PVAF(B) = [1 – (1 / (1 + 0.1)^5)] / 0.1 = 3.790786769

EAB(A) = NPV(A) / PVAF(A)

EAB(A) = 489.481593 / 2.486851991

EAB(A) = 196.8277946
EAB(B) = NPV(B) / PVAF(B)

EAB(B) = 686.180154 / 3.790786769

EAB(B) = 181.0125960

We should choose Project A because it has a higher EAB.

5D) Real Rate

(1+nom) = (1+real)(1+inflation)

(1+0.1) = (1+real)(1+0.03)

(1+0.1) / (1+0.03) = 1 + real

1.1 / 1.03 = 1 + real

(1.1 / 1.03) – 1 = real

0.067961165 = real

The real rate of return is 6.80%

5E) Real Cash Flows

REAL CASH FLOWS A

Period Cash Flow Calculation Real

0 -1,500 - -1,500
1 800 / 1.03 776.70
2 800 / 1.03^2 754.08
3 800 / 1.03^3 732.11

REAL CASH FLOWS B

Period Cash Flow Calculation Real

0 -5,000 - -5,000
1 1,500 / 1.03 1,456.31
2 1,500 / 1.03^2 1,413.89
3 1,500 / 1.03^3 1,372.71
4 1,500 / 1.03^4 1,332.73
5 1,500 / 1.03^4 1,293.91
5F) NPV, Real Cash Flows

REAL NPV PROJECT A

PV(CF1) = 776.6990291 / (1.067961165) = 727.2727273

PV(CF2) = 754.0767273 / (1.067961165^2) = 661.1570248

PV(CF3) = 732.1133275 / (1.067961165^3) = 601.0518408

PV(inflows) 1,989.481593

Minus PV(outflows) - 1,500. 000000

Real NPV(A) = 489.481593

REAL NPV PROJECT B

PV(CF1) = 1456.310680 / (1.067961165) = 1,363.636363

PV(CF2) = 1413.893864 / (1.067961165^2) = 1,239.669422

PV(CF3) = 1372.712489 / (1.067961165^3) = 1,126.972201

PV(CF4) = 1332.730572 / (1.067961165^4) = 1,024.520183

PV(CF5) = 1293.913177 / (1.067961165^5) = 931.3819851

PV(inflows) 5,686.180154

Minus PV(outflows) -5,000.000000

Real NPV(B) = 686.180154

Both Real NPVs are the same as the nominal NPVs.

5G) Real EAB

PVAF(A) = [ 1 – (1 / (1 + 0.067961165)^3)] / 0.067961165 = 2.634122465

PVAF(B) = [ 1 – (1 / (1 + 0.067961165)^5)] / 0.067961165 = 4.122678118

EAB(A) = NPV(A) / PVAF(A)

EAB(A) = 489.481593 / 2.634122465

EAB(A) = 185.8234002
EAB(B) = NPV(B) / PVAF(B)

EAB(B) = 686.180154 / 4.122678118

EAB(B) = 166.4403901

Choose Project A because it has a higher real EAB.

Assignment 3 Question 6

Replacement

Co (old) = 1,000,000, t=-2

S(old) = 300,000, t = 0

S(old) = 50,000, t=5

Co(new) – 1,500,000, t=0

S(new) = 300,000, t=5

Co = Co(new) – S(old @ t=0)

Co= 1,500,000 – 300,000

Co = 1,200,000

S = S(new) – S(old @ t=5)

S= 300,000 – 50,000

S = 250,000

CCa = 30%, r = 15%

PV(INFLOWS)

PV(CCATS) = [(Cdt / (r + d)) * ((1 + 0.5r) / (1 + r))] – [(Sdt / (r + d)) / (1 + r)^N]

PV(CCATS) = [((1,200,000)(0.3)(0.2)) / (0.15 + 0.3) / (1 + 0.5(0.15)) / (1.15)] – [((250,000)(0.3)(0.2)) / (0.15

+ 0.3) / (1.15^5)]

PV(CCATS) = [(72,500 / 0.45) * (1.075/1.15)] – [(15,000 / 0.45)) / (1.15^5)]

PV(CCATS) = 160,000 * 0.934782609 – (33,333.33333 / (1.15^5))

PV(CCATS) = 149,565.2174 – 16,572.55784

PV)CCATS) = 132,992.6596

PV(S) = 250,000 / (1.15^5)

PV(S) = 124,294.1838

OUTFLOWS

Co = 500,000

NPV = PV(inflows) – PV(outflows)

NPV = 132,992.6596 + 124,294.1838 – 500,000

NPV = 257,286.8434 – 500,000

NPV = -242,713.1566

No, the computers should not be replaced, because the NPV is - $242,713.16.

Assignment 3 Question 7

7A) Cash Breakeven

Qcash = FC / (P – v)

Qcash = 150,000 / (200 – 150)

Qcash = 3,000 units

(assuming tax shields cannot be applied)

7B) Accounting Breakeven

Qacc = (FC + D) / (P – v)

Qacc = (150,000 + 190,000) / (200 -150)

Qacc = 340,000 / 50

Qacc = 6,800 units

7C) Financial Breakeven

PVAF = [1 – (1 / (1 + 0.15)^5)] / 0.15

PVAF = 3.352155098

PV(OCF) = OCF * PVAF

PV(OCF) = OCF * 3.352155098

At NPV = 0,

NPV = PV(inflows) – PV(outflows)

0 = (OCF * 3.352155098) – 950,000

950,000 = OCF * 3.352133098

OCF = 283,399.7748

Qfin = (FC+ [OCF – (T*D)) / (1 – T))) / (P – v)

Qfin = [150,000 + (283,399.7748 + (0.35 * 190,000)) / (1 – 0.35)] / (250 – 50)

Qfin = [150,000 = (283,399.7748 + 66,500) / 0.65] / 50

Qfin = [(150,000 + 416,399.7748) / 0.65] / 50

Qfin = (566,399.7748 / 0.65) / 50

Qfin = 871,384.2689 / 50

Qfin = 17,427.68538

Qfin = 17,428 units

7D) Degree of Operating Leverage

CASH DOL

DOL = 1 + (150,000 / 0)

DOL = infinity

ACCOUNTING DOL
OCF = [[(P – v) Q – FC] * (1 – T)] + DT

OCF = [[(200 – 50) 6,800 – 150,000] * (1 – 0.35)] + (190,000 * 0.35)

OCF =[[(50) 6,800 – 150,000] * 0.65] + 66,500

OCF = [(340,000 – 150,000) * 0.65] + 66,500

OCF = (190,000 * 0.65) + 66,500

OCF = 123,500 + 66,500

OCF = 247,000

DOL = 1 + (FC / OCF)

DOL = 1 + (150,000 / 247,000)

DOL = 1 + 0.607287449

DOL = 1.607287449

DOL = 1.61

FINANCIAL DOL

DOL = 1 + (FC / OCF)

DOL = 1 + (150,000 / 283,399.7748)

DOL = 1 + 0.529287647

DOL = 1.529387647

DOL = 1.53

Assignment 3 Question 8

Co = 680,000 Q = 100
Dep = 680,000 / 4 = 170,000 FC = 150,000
V = 14,000 S=0
P = 19,000 R = 15%
N=4 T = 35%

8Ai) NPV

NPV = PV(inflows) – PV(outflows)

INFLOWS

ATOCF = [[(P – v)Q – FC] * (1-T) – DT]

ATOCF = [(19,000 – 14,000) 100 – 150,000] * (1-0.35) + (170,000 * 0.35)

ATOCF = [5,000(100) – 150,000] * 0.62 + 59,500

ATOCF = (500,000 – 150,000) * 0.62 + 59,500

ATOCF = (350,000 * 0.62) + 59,500

ATOCF = 227,500 + 59,500

ATOCF = 287,000, t=1,2,3,4

PV(INFLOWS)

PV(ATOCF) = 287,500 [ 1 – (1 / (1 + 0.15)^4)] / 0.15

PV(ATOCF) = 819,378.7901

OUTFLOWS

Co = 680,000, t=0

NPV = 819,378.7901 – 680,000

NPV = 139,378.7901

The NPV is $139,378.79.

8Aii) Profitability Index

PI = P(inflows) / PV(outflows)

PI = 819,378.7901 / 680,000

PI = 1.204968809

The profitability index is 1.20

8Aiii) Payback Period

Period Cash Flow Remaining

0 -680,000 680,000
1 287,000 -393,000
2 287,000 -106,000
3 287,000 181,000
4 287,000 468,000

Payback = 2 years + (106,000/287,000) * 12 = 2 years + 0.369337979 * 12 = 2 years, 4.43 months

The payback period is 2 years and 4 months.

8Aiv) Discounted Payback

Period Cash Flow Calculation Discounted Remaining

0 -680,000 - - -680,000
1 287,000 /1.15 249,565.2174 -430,434.7826
2 287,000 /(1.15^2) 217,013.2325 -213,421.5501
3 287,000 /(1.15^3) 188,707.1587 -24,714.3914
4 287,000 /(1.15^4) 164,093.1815 139,378.7901

Discounted payback = 3 + (24714/164073.1815)*12 = 3 years 1.8 months

The discounted payback period is 3 years and 2 months

8Av) IRR

NPV = PV(inflows) – PV(outflows)

0 = [287,000 [1 – (1 / (1 + IRR)^4)] / IRR] – 6680,000

680,000 = 287,000 [1 – (1 / (1 + IRR)^4)] / IRR

Use Financial Calculator

PV = 680,000

PMT = -287,000

N=4

COMP I/Y = 24.81642528

The IRR is 24.82%

8Avi) AAR

Net Income = [(P – v)Q – FC – Dep] * (1-T)

NI = [(19,000 – 14,000) 100 – 150,000 – 170,000] * (1-0.35)

NI = [5,000 (100) – 320,000] * 0.65

NI = (500,000 – 320,000) * 0.65

NI = 180,000 * 0.65

NI = 117,000

Average Book Value = 680,000 – 0 / 2 = 340,000

AAR = NI / Ave BV

AAR = 117,000 / 340,000

AAR = 0.344117647

The AAR is 34.41%

8B)

Co = 680,000 Q = 110 or 90
Dep = 680,000 / 4 = 170,000 FC = 150,000
V = 14,000 S=0
P = 19,000 R = 15%
N=4 T = 35%

8Bi) Sensitivity of NPV

NPV @ =10% Q (Q = 110)

NPV = PV(inflows) – PV(outflows)

INFLOWS

ATOCF = [[(P – v)Q – FC] * (1-T) – DT]

ATOCF = [(19,000 – 14,000) 110 – 150,000] * (1-0.35) + (170,000 * 0.35)

ATOCF = [5,000(110) – 150,000] * 0.62 + 59,500

ATOCF = (550,000 – 150,000) * 0.62 + 59,500

ATOCF = (400,000 * 0.62) + 59,500

ATOCF = 260,000 + 59,500

ATOCF = 319,500, t=1,2,3,4

PV(INFLOWS)

PV(ATOCF) = 319,500 [ 1 – (1 / (1 + 0.15)^4)] / 0.15

PV(ATOCF) = 912,165.5869

OUTFLOWS

Co = 680,000, t=0

NPV = 912,165.5869 – 680,000

NPV = 232,165.5869

% CHANGE IN NPV

% change = new NPV / old NPV

% change = 232,165.5869 / 139,378.7901

% change = 1.665716762

NPV @ -10%Q (Q = 90)

NPV = PV(inflows) – PV(outflows)

INFLOWS

ATOCF = [[(P – v)Q – FC] * (1-T) – DT]

ATOCF = [(19,000 – 14,000) 90 – 150,000] * (1-0.35) + (170,000 * 0.35)

ATOCF = [5,000(90) – 150,000] * 0.62 + 59,500

ATOCF = (450,000 – 150,000) * 0.62 + 59,500

ATOCF = (300,000 * 0.62) + 59,500

ATOCF = 195,000 + 59,500

ATOCF = 254,500, t=1,2,3,4

PV(INFLOWS)

PV(ATOCF) = 254,500 [ 1 – (1 / (1 + 0.15)^4)] / 0.15

PV(ATOCF) = 726,591.9933

OUTFLOWS

Co = 680,000, t=0

NPV = 726,591.9933 – 680,000

NPV = 46,591.9931

% CHANGE IN NPV

% change = 46,591.9931 / 139,378.7901

% change = 0.3342883238

A 10% change in demand would result in a 33% change in NPV in either direction.

8Bii) Sensitivity of PI

PI @ + 10% Q (Q = 110)

PI = PV(inflows) / PV(outflows)

PI = 912,165.5869 / 680,000

PI = 1.341419981

% CHANGE IN PI

% change = new PI / old PI

% change = 1.341419981 / 1.204968809

% change = 1.113240418
PI @ - 10%Q (Q = 90)

PI = PV(inflows) / PV(outflows)

PI = 726,591.9933 / 680,000

PI = 1.068517637

% CHANGE IN PI

% change = new PI / old PI

% change = 1.068517637

% change = 0.886759582

A 10% change of demand in either direction would result in a 11% rise or 11% drop in PI.

8Biii) Sensitivity of Payback Period

PAYBACK @ +10% Q

Period Cash Flow Remaining

0 -680,000 680,000
1 319,500 -360,500
2 319,500 -41,000
3 319,500 278,000
4 319,500 598,000

Payback = 2 year + (41,000/319,500) * 12 = 2 years + (0.128325509) * 12 = 2 years + 1.5 months

% CHANGE IN PAYBACK PERIOD

% change = new payback / old payback

% change = 2.128325509 / 2.369337979

% change = 0.898278560

PAYBACK @ -10% Q

Period Cash Flow Remaining

0 -680,000 680,000
1 254,500 -425,500
 2 254,500 -171,000
3 254,500 83,500
4 254,500 338,000

Payback = 2 years + (171,000 / 254,500) * 12 = 2 years + (0.671905697) * 12 = 2 years + 8 months

% CHANGE IN PAYBACK PERIOD

% change = new payback / old payback

% change = 2.671905687 / 2.369337979

% change = 1.127701375

A 10% change in demand in either direction would result in the payback period being ~ 12% shorter or
longer.

8Biv) Sensitivity of Discounted Payback Period

Discounted Payback Period @ + 10% Q

Period Cash Flow Calculation Discounted Remaining

0 -680,000 - - -680,000
1 319,500 /1.15 277,826.0870 -402,173.930
2 319,500 /(1.15^2) 241,587.9017 -160,586.0113
3 319,500 /(1.15^3) 210,076.4363 49,490.425
4 319,500 /(1.15^4) 182,675.1620 232,165.5870

Discounted payback = 2 years + (160586/210076.4363) * 12 = 2 years + 0.764417058 * 12 = 2 years + 9.2

months

% CHANGE IN DISCOUNTED PERIOD

% change = new discounted / old discounted

% change = 2.764417058 / 3.150611934

% change = 0.877422265
DISCOUNTED PAYBACK PERIOD @ - 10%

Period Cash Flow Calculation Discounted Remaining

0 -680,000 - - -680,000
1 254,500 /1.15 221,304.3478 -458,695.6522
2 254,500 /(1.15^2) 192,438.5633 -266,257.0889
3 254,500 /(1.15^3) 167,337.8812 -98,919.20770
4 254,500 /(1.15^4) 145,511.2010 46,591.9933

Discounted payback = 3 years + (98919.20770 / 145511.2010) * 12 = 3 years (0.679804764* 12) = 3

years + 8.2 months

% CHANGE IN DISCOUNTED PAYBACK PERIOD

% change = new discounted / old discounted

% change = 3.679804764 / 3.150611934

% change = 1.167965094

Bv) Sensitivity of IRR

IRR @ + 10% Q

680,000 = 319,500 [1 – (1 / (1 + IRR)^4)] / IRR

PV = 680,000

PMT= -319,500

N=4

COMP I/Y = 31.06043996%

CHANGE IN IRR

% change = new IRR – old IRR

% change = 31.06043996 – 24.81642528

% change = 6.244014677

IRR @ -10% Q

680,000 = 254,500 [1 – (1 / (1 + IRR)^4)] / IRR

PV = 680,000

PMT= -254,500

N=4

COMP I/Y = 18.34903579%

CHANGE IN IRR

% change = new IRR – old IRR

% change = 18.34903579 – 24.81642528

% change = 6.244014677

A 10% change in demand in either direction would result in a ~6% increase or ~6% decrease in IRR.

8Bvi) Sensitivity of AAR

AAR @ + 10% Q

Net Income = [(P – v)Q – FC – Dep] * (1-T)

NI = [(19,000 – 14,000) 110 – 150,000 – 170,000] * (1-0.35)

NI = [5,000 (110) – 320,000] * 0.65

NI = (500,000 – 320,000) * 0.65

NI = 230,000 * 0.65

NI = 149,500

Average Book Value = 680,000 – 0 / 2 = 340,000

AAR = NI / Ave BV

AAR = 149,500 / 340,000

AAR = 0.439705882 = 43.9705882%

% CHANGE IN AAR

% change = new AAR – old AAR

% change = 43.9705882 – 34.4117647

% change = 9.558811730

AAR @ -10% Q

Net Income = [(P – v)Q – FC – Dep] * (1-T)

NI = [(19,000 – 14,000) 100 – 150,000 – 170,000] * (1-0.35)

NI = [5,000 (90) – 320,000] * 0.65

NI = (450,000 – 320,000) * 0.65

NI = 130,000 * 0.65

NI = 84,500

Average Book Value = 680,000 – 0 / 2 = 340,000

AAR = NI / Ave BV

AAR = 84,500 / 340,000

AAR = 0.248529412 = 24.8529412%

% CHANGE IN AAR

% change = new AAR – old AAR

% change = 24.8529412 – 34.41177647

% change = -9.558835294

An increase or decrease of 10% demand would result in an AAR change of 9.55% in either direction.

Assignment 3 Question 9

Q = 35,000 V = 200
N=5 CCA = 20%
Co = 1,500,000 S = 500,000
FC = 300,000 P = 250
Addition to NWC = 450,000 R = 15%
NWC recovery = 450,00 T = 38%
9A) Base NPV

NPV = PV(inflows) – PV(outflows)

INFLOWS

NWC rec = 450,000, t=5

CAA tax shield = use CCA formula

S = 500,000, t = 5

ATOCF w/o CCA = [(P – v) Q – FC] * (1 – T)

ATOCF w/o CCA = [(250 – 200) 35,000 – 300,000] * (1 – 0.38)

ATOCF w/o CCA = [(50) 35,000 – 300,000] * 0.62

ATOCF w/o CCA = (1,750,000 – 300,000) * 0.62

ATOCF w/o CCA = 1,450,000 * 0.62

ATOCF w/o CCA = 899,000, t=1,2,3,4,5

PV(INFLOWS)

PV(ATOCF w/o CCA) = ATOCF w/o CCA * PVAF

PV(ATOCF w/c CCA) = 899,000 [1 – (1 / (1 + 0.15)^5)] / 0.15

PV(ATOCF w/o CCA) = 3,013,587.433

PV(CCATS) = [(Cdt / (r + d)) * ((1 + 0.5r) / (1 + r))] – [(Sdt / (r + d)) / (1 + r)^N]

PV(CCATS) = [((1,500,000)(0.2)(0.38)) / (0.15 + 0.2)) * ((1 + (0.5 * 0.15)) / (1 + 0.15)) – [((500,000)(0.2)

(0,38)) / (0.15 + 0.2)) / (1 + 0.15)^5]

PV(CCATS) = [(114,000 / 0.35) * (1.075 / 1.15)] – [(38,000 / 0.35) / (1.15^5)]

PV(CCATS) = 325,714.2857 * 0.934782609 – (108,571.4286 / (1.15^5))

PV(CCATS) = 304,472.0498 – 53,979.18840

PV(CCATS) = 250,492.8614

PV(S) = 500,000 / (1 + 0.15)^5

PV(S) = 248,588.3676
PV(NWC rec) = 450,000 / (1 + 0.15) ^5

PV(NWC rec) = 223,729.5309

OUTFLOWS

Co = 1,500,000, t=0

Addition to NWC = 450,000, t=0

NPV = PV(inflows) – PV(outflows)

NPV = 3,013,587.433 + 250,492.8614 + 248,588.3676 + 223,729.5309 – 1,500,000 – 450,000

NPV = 1,786,398.193

The base NPV is $1,786,398.13.

9B) Best and Worst Case Scenarios

BEST CASE : )

Q = 35,000 V = 200
N=5 CCA = 20%
Co = 1,500,000 * 0.85 = 1,275,000 S = 500,000 * 1.15 = 575,000
FC = 300,000 P = 250* 1.1 = 275
Addition to NWC = 450,000 * 0.95 = 427,500 R = 15%
NWC recovery = 450,00 *0.95 = 427,500 T = 38%

INFLOWS

CCATS = use CCATS formula

S = 575,000, t = 5

NWC rec = 427,500, t=5

ATOCF w/o CCA= [(P - v)Q – FC] * (1 – T)

ATOCF w/o CCA = [(275 – 200) 35,000 – 300,000) * (1 – 0.38)

ATOCF w/o CCA = [75 (35,000) – 300,000] * 0.62

ATOCF w/c CCA = (2,625,000 – 300,000) * 0.62

ATOCF w/o CCA = 2,325,000 * 0.62

ATOCF w/o CCA = 1,441,500, t=1,2,3,4,5

PV(INFLOWS)

PC(CCATS) = [(Cdt / (r + d)) * ((1 + 0.5r) / (1 + r))] – [(Sdt / (r + d)) / (1 + r)^N]

PV(CCATS) = [((1,275,000)(0.2)(0.38)) / (0.15 + 0.2)) * ((1 + (0.5 * 0.15)) / (1 + 0.15)) – [((575,000)(0.2)

(0,38)) / (0.15 + 0.2)) / (1 + 0.15)^5]

PV(CCATS) = [(96,900 / 0.35) * (1.075 / 1.15)] – [(43,700 / 0.35) / (1.15^5)]

PV(CCATS) = 276,857.1429 * 0.934782609 – (124,857.1429 / (1.15^5))

PV(CCATS) = 258,801.2424 – 62,076.06666

PV(CCATS) = 196,725.1757

PV(ATOCF w/o CCA) = 1,441,500 [1 – (1 / (1 + 0.15)^5)] / 0.15

PV(ATOCF w/o CCA) = 4,832,131.574

PV(NWCrec) = 427,500 / (1.15^5)

PV(NWCrec) = 212,543.0543

PV(S) = 575,000 / (1.15^5)

PV(S) = 285,876.6228

OUTFLOWS

Co = 1,275,000, t=0

NWC = 427,500, t=0

Best Case NPV = PV(inflows) – PV(outflows)

Best Case NPV = 196,725.1757 + 4,832,131.574 + 212,543.0543 + 285,876.6228 – 1,275,000 – 427,500

Best Case NPV = 5,527,276.427 – 1,702,500

Best Case NPV = 3,825,276.427

WORST CASE : (

Q = 35,000 V = 200
N=5 CCA = 20%
Co = 1,500,000 * 1.15 = 1,725,000 S = 500,000 * 0.85 = 425,000
FC = 300,000 P = 250* 0.95 = 225
Addition to NWC = 450,000 * 1.05 = 472,500 R = 15%
NWC recovery = 450,00 * 1.05 = 472,500 T = 38%

INFLOWS

CCATS = use CCATS formula

S = 525,000, t = 5

NWC rec = 472,500, t=5

ATOCF w/o CCA= [(P - v)Q – FC] * (1 – T)

ATOCF w/o CCA = [(225 – 200) 35,000 – 300,000) * (1 – 0.38)

ATOCF w/o CCA = [25 (35,000) – 300,000] * 0.62

ATOCF w/c CCA = (875,000 – 300,000) * 0.62

ATOCF w/o CCA = 575,000 * 0.62

ATOCF w/o CCA = 356,500, t=1,2,3,4,5

PV(INFLOWS)

PC(CCATS) = [(Cdt / (r + d)) * ((1 + 0.5r) / (1 + r))] – [(Sdt / (r + d)) / (1 + r)^N]

PV(CCATS) = [((1,725,000)(0.2)(0.38)) / (0.15 + 0.2)) * ((1 + (0.5 * 0.15)) / (1 + 0.15)) – [((425,000)(0.2)

(0,38)) / (0.15 + 0.2)) / (1 + 0.15)^5]

PV(CCATS) = [(425,000 / 0.35) * (1.075 / 1.15)] – [(32,300 / 0.35) / (1.15^5)]

PV(CCATS) = 374,571.4286 * 0.934782609 – (92,285.7142 / (1.15^5))

PV(CCATS) = 350,142.8573 – 45,882.31014

PV(CCATS) = 304,260.5472

PV(ATOCF w/o CCA) = 356,500 [1 – (1 / (1 + 0.15)^5)] / 0.15

PV(ATOCF w/o CCA) = 1,195,043.292

PV(NWCrec) = 472,500 / (1.15^5)

PV(NWCrec) = 234,916.0074

PV(S) = 425,000 / (1.15^5)

PV(S) = 211,300.1125

OUTFLOWS

Co = 1,725,000, t=0

NWC = 472,500, t=0

Worst Case NPV = PV(inflows) – PV(outflows)

Worst Case NPV = 304,260.5472 + 1,195,043.292 + 234,916.0074 + 211,300.1125 – 1,725,000 – 472,500

Worst Case NPV = 1,945,519.9959 – 2,197,500

Worst Case NPV = -251,980.0409

The Best Case Scenario NPV is $3,825,276.43, and the Worst Case Scenario NPV is -$251,980. 04.