Financial Management

FIN 410

Individual Project 4

1. Prepare a statement showing the incremental cash flows for this project over an 8-year period.

-Initial investment:

I = $1,000,000

-Working Capital:

WC = $200,000

ChWCi = Previous Year WC - Current WC = 0 (for i=1 to 7)

ChWC0 = -$200,000

The working capital is recovered, this means that for the end of the year 8 it will be zero or:

ChWC8 = $200,000

-Depreciation:

Di = (Invest in plant and equipment)/5 = $1,000,000/5 = $200,000

For the years 6 to 8 the depreciation will be zero.

-Revenues:

R1 = $950,000

For the years Yi (i=2 to 8):

Ri = $1,500,000

-Expenses:

Indirect incremental costs will be $80,000 all the eight years.

For each year the direct costs will be 0.55*Ri .

Then for each year Yi (i=1 to 8), the expenses (Ei) will be:

Ei = $80,000 + 0.55*Ri ,

then:

E1 = $80,000 + 0.55*$950,000 = $602,500

For i=2 to 8:

Ei = $80,000 + 0.55*$1,500,000 = $905,000

-Taxes:

The firm's marginal tax rate is 35%, then the taxes will be:

T1 = 0.35*($950,000-$602,500-$200,000) = $51,625

For i=2 to 5

Ti = 0.35*($1,500,000-$905,000-$200,000) = $138,250

For i=6 to 8

Ti = 0.35*($1,500,000-$905,000-$0) = $208,250

YEARS (IN THOUSANDS)

0 1 2 3 4 5 6 7 8

1.Revenues 0 950 1500 1500 1500 1500 1500 1500 1500

2.Expenses 0 602.5 905 905 905 905 905 905 905

3.Depreciation 0 200 200 200 200 200 0 0 0

4.Income before 0 147.5 395 395 395 395 595 595 595

tax, [1-(2+3)]

5.Taxes 0 51.6 138.2 138.2 138.2 138.2 238.2 238.2 238.2

6.Net Income 0 95.9 256.8 256.8 256.8 256.8 356.8 356.8 356.8

[4-5]

7.Cash flow

from operation 0 295.9 456.8 456.8 456.8 456.8 356.8 356.8 356.8

[1-2-5]

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8.Investments -1000 0 0 0 0 0 0 0 0

9.Change in WC -200 0 0 0 0 0 0 0 200

10.Total cash -1200 0 0 0 0 0 0 0 200

flow from investment

--------------------------------------------------------------

11.Total cash -1200 295.9 456.8 456.8 456.8 456.8 356.8 356.8 556.8

flow

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2. Calculate the Payback Period and the NPV for the project.

-Payback Period:

PB = Y + U/CFi

We will consider the total initial investment (TI) as the sum of the

invest in plant and equipment plus the initial Working Capital

required.

TI = $1,200,000

At the