- Table 1 Macrs Depreciation Allowances Year 12345678 3 4 Recovery Period Class 5 Years 3 Years 33 33 44 44 14 82 7 41 20 1 (14.57 KiB) Viewed 23 times
- Table 1 Macrs Depreciation Allowances Year 12345678 3 4 Recovery Period Class 5 Years 3 Years 33 33 44 44 14 82 7 41 20 2 (108.82 KiB) Viewed 23 times
- Table 1 Macrs Depreciation Allowances Year 12345678 3 4 Recovery Period Class 5 Years 3 Years 33 33 44 44 14 82 7 41 20 3 (99.72 KiB) Viewed 23 times
- Table 1 Macrs Depreciation Allowances Year 12345678 3 4 Recovery Period Class 5 Years 3 Years 33 33 44 44 14 82 7 41 20 4 (25.22 KiB) Viewed 23 times
Suggestions: Note that the numbers could be slightly different due to rounding. Step 1: Since the price and variable costs increase by 1 percent, and the inflation rate is 3 percent, the nominal growth rate in both price and variable costs is: (1 + nominal rate) = (1 + real rate)(1 + inflation rate) nominal rate = [(1.01)(1.03)]-1 = .0403, or 4.03% Step 2: To analyze this project, we must calculate the incremental cash flows generated by the project. The sales of new automobiles will grow by 2 percent per year, and there are four tires per car. Since the company expects to capture 12 percent of the market, the number of tires sold in the OEM market for the first two years will be: Year 1 Automobile sold 10,000,000 Tires for automobile sold SuperTread tires sold 40,000,000 (=10,000,000 x 4) 4,800,000 (= 40,000,000 x 0.12) Compute the SuperTread tires sold in the OEM market for year 3 and year 4. Step 3: The number of tires sold in the replacement market will grow at 1.5 percent per year, and the company will capture 10 percent of the market. So, the number of tires sold in the replacement market for the first two years will be: Tires for automobile sold SuperTread tires sold Year 1 Year 1 40,000,000 4,000,000 (= 40,000,000 x 0.10) Compute the SuperTread tires sold in the replacement market for year 3 and year 4. Step 4: The tires will be sold in each market at a different price. The price will increase each year at the rate calculated earlier (4.03 percent), so the prices for year 1 and year 2 will be: OEM market $50 Replacement market $75 Similarly, the variable costs per tire for year 1 and year 2 will be: Year 1 Year 2 OEM market Replacement market Find the prices and unit variable costs for year 3 and year 4. $35 $35 10,200,000 (= 10,000,000 x 1.02) 40,800,000 (= 10,200,000 x 4) 4,896,000 (= 40,800,000 x 0.12) Year 2 40,600,000 (= 40,000,000 x 1.015) 4,060,000 (40,600,000 x 0.10) Year 2 $52.02 (= 50 x 1.0403) $78.02 ( 75x 1.0403) Year 2 $36.41 (35 x 1.0403) $36.41 (35 x 1.0403)
Step 5: We multiply the number of tires sold in each market by the respective price in that market. The revenues for the first two years will be: OEM market Replacement market Total revenue OEM market Replacement market Total variable costs The variable costs for year 1 and year 2 will be: Revenue Variable costs Year 1 $168,000,000 (= 4,800,000 x 35) $140,000,000 (= 4,000,000 x 35) $308,000,000 Find total revenues and total variable costs for year 3 and year 4. Marketing and general costs Depreciation $240,000,000 (= 4,800,000 x 50) $300,000,000 (= 4,000,000 x 75) $540,000,000 EBT Tax at 25% Net income (after-tax) Year 1 Beginning Ending NWC cash flow Step 6: Now we can calculate the operating cash flows. The operating cash flows for year 1 and year 2 will be: Year 1 (22.282,500) 66,847,500 Year 2 109.717.500 $254,665,440 (4,896,000 x 52.02) $316,771,350 (= 4,060,000 x 78.02) $571.436.790 Year 2 Year 1 $178,265,808 (= 4,896,000 x 36.41) $147.826,630 (= 4,060,000 x 36.41) $326.092.438 $540,000,000 (308,000,000) (100,000,000) (103,000,000) [= 100,000,000 x 1.03] (42.870,000) [= 300,000,000 x 0.1429) (73.470,000) [= 300,000,000 x 0.2449] 89,130,000 68,874.352 Year 2 $571,436,790 (326,092,438) OCF (= Net income + Depreciation) Compute operating cash flows for year 3 and year 4. Step 7: Net working capital is a percentage of sales, so the net working capital requirements will change every year. The net working capital cash flows (or net working capital requirements or change in NWC) will be: (17,218,588) 51,655,764 125,125,764 Year 2 $20,000,000 $54,000,000 54,000,000 (= 540,000,000 x 0.10) 57,143,679 (= 571,436,790 x 0.10) 34,000,000 3,143,679 Calculate net working capital cash flows for year 3 and year 4. When you add the project's net working capital cash flows from Years 1 to 4, the sum should be equal to, in magnitude but opposite sign, the net working capital in year 0. In other words, ANWC+ ANWC₁ + ANWC₂+ ANWC3 + ANWC4 = 0.
Step 8: You need to calculate the after-tax salvage value (or resale value) of the equipment. You first need to calculate the book value of the equipment at the end of the project (i.e., year 4) by subtracting the accumulated depreciation from the original cost of $300,000,000. You then compute the after-tax salvage value and include it as part of cash flow of the project in year 4. Step 9: The net (or total) cash flow for each year from years 1 to 3 consists of the operating cash flow and net working capital. The net cash flow in year 4 includes the operating cash flow, net working capital, and after-tax salvage value of the equipment. You can then compute the net present value (NPV) using these cash flows and cash flows from year 0.