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# Anıl Sural - Cash Flow Analysis

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### Anıl Sural - Cash Flow Analysis

1. 1. 1
2. 2. Shrieves Casting Company is considering adding a new line to its product mix and the capital budgeting analysis is being conducted. The production line would be set up in usued space in Shrieves’ main plant. The machinery’s invoice price would be approximately \$220,000, another \$10,000 in shipping charges would be required, and it would cost an additional \$30,000 to install the equipment. The machinery has an economic life of 4 years and the accelerated depreciation rates are as follows: Year 1: 33%,.Year 2: 45%, Year 3: 15%, Year 4: 7%. The machinery is expected to have a salvage value of \$50,000 after 4 years of use. The new line would generate incremental sales of 1,500 units per year for 4 years at an incremental cost of \$100 per unit in the first year, excluding depreciation. Each unit can be sold for \$200 in the first year. The sales price and cost are expected to increase by 5% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 20% of sales revenues. The firm’s tax rate is 40%, and its overall weighted average cost of capital is 10%. 2
3. 3. A. What is the machinery’s depreciable cost basis ?What are the annual depreciation expenses ? Depreciation Basis: Cost + Shipping + Installation Basis = Cost ( \$220,000) + Shipping ( \$10,000) + Installation ( \$30,000) = \$260,000 3
4. 4. What are the annual depreciation expenses ?Annual Depreciation Expense Year % (Inıtıal Basis) =Depreciation 1 33% * \$260,000 \$85.8 2 45% * \$260,000 \$117 3 15% * \$260,000 \$39 4 7% * \$260,000 \$18.2 4
5. 5. B. Calculate the annual sales revenues and costs.Annual Sales and Costs ( 5% inflation is assumed ) Year 1 Year 2 Year 3 Year 4Units Quantity 1500 1500 1500 1500Unit Selling price \$200 \$210 \$220,5 \$231,52Unit Cost \$100 \$105 \$110,25 \$115,76Sales \$300000 \$315000 \$330750 \$347280Costs \$150000 \$157500 \$165375 \$173640Revenue \$150000 \$157500 \$165375 \$173640 5
6. 6. Why is it important to include inflation whenestimating revenues and costs ?  Nominal r > real r. The cost of capital, r, includes a premium for inflation.  Nominal CF > real CF. This is because inflation.  If you discount real CF with the higher nominal r, then your NPV estimate would be too low.  Nominal CF should be discounted with nominal r and real CF should be discountes with real r.  It is more realistic to find the nominal CF than it is to reduce the nominal r to a real r. 6
7. 7. C. Calculate the annual operating cash flows of theinvestment Year 1 Year 2 Year 3 Year 4Sales \$300,000 \$315,000 \$330,750 \$347,280Cost \$150,000 \$157,500 \$165,375 \$173,640Deprec. \$85,800 \$117,000 \$39,000 \$18,200EBIT \$64,200 \$40,500 \$126,375 \$155,440Taxes(40%) \$25,680 \$16,200 \$50,500 \$62,176EBIT(1-T) \$38,520 \$24,300 \$75,825 \$93,264+Deprec. \$85,800 \$117,000 \$39,000 \$18,200Net Op. CF \$124,320 \$141,300 \$114,825 \$111,464 7
8. 8. D. Estimate the required net working capital for eachyearNet Working Capital For Each YearYear Sales NWC (%20) CF Due To Inv. In NWC•0 - 60,000 -60,000•1 300,000 63,000 -3000•2 315,000 66,150 -3150•3 330,750 69,456 -3300•4 347,280 0 -69,456 8
9. 9. E. Calculate the after-tax salvage cash flowSalvage Cash FlowSalvage Value 50,000Book Value 0Gain 50,000Tax on SV(0.4) 20,000Net Terminal Cash Flow 30,000 9
10. 10. F. Calculating net cash flows and NVP Year 0 Year 1 Year 2 Year 3 Year 4 Initial Cost -\$300,000 0 0 0 0 Operational CF 0 \$124,320 \$141,300 \$114,825 \$111,464 NWC CF -\$60,000 -\$3,000 -\$3,150 -\$3,300 -\$69,456 Salvage CF 0 0 0 0 \$30,000 Net Cash Flow -\$320,000 \$121,320 \$138,150 \$111,525 \$72,008 0 1 2 3 4 NPV = \$37,437 > \$0-\$320,000 \$121,320 \$138,150 \$111,525 \$72,008 10
11. 11. ANY QUESTION?THANKS FOR YOUR ATTENTION! 11