NPV

Sales forecast (units per year)

Product life (years)
Expected wholesale price ($ unit)
Production cost ($ unit)
Selling, General and Administrative Costs ($ per year)
New equipment cost ($)
Years of depreciation
tax rate
Receivables (% of sales)
Payables (% of COGS)
WACC
Item

2,862,082

50,000
4
260
110
2,800,000
7,500,000
5
40%
15%
15%
12%
Formula

Incremental Revenue

=50000*260

Production Costs
Selling, General and Administrative Costs
Depreciation

=-50000*110
=-7500000/5

Incremental Cost
Incremental EBIT
Tax, 40%

=EBIT*40%

Incremental Earnings
Receivables
Payables
Net Working Capital
Change in Net Working Capital
Add back Depreciation
Purchase Equipment
Incremental Free Cash Flow
WACC = 12%
Present Value of FCF
NPV
Comments:

=15%*Sales
=15%*COGS

Initial
50,000
4
260
110
2,800,000
7,500,000
5
40%
15%
15%
12%
Year

- Even though the project lasts for 4 years, the equipment has a 5-year life, so we must account for the final depre
- Negative EBIT provides a tax credit => has positive impact on after-tax earnings and cash flows as long as long as
- Why do we ignore interest expenses?

worst case
35,000
4
240
120
2,800,000
7,500,000
5
40%
15%
15%
15%
0

best case
65,000
4
280
100
2,800,000
7,500,000
5
40%
15%
15%
10%
1
$ 13,000,000

2
$

13,000,000

3
$

13,000,000

4
$

13,000,000

$ (5,500,000) $
$ (2,800,000) $
$ (1,500,000) $

(5,500,000) $
(2,800,000) $
(1,500,000) $

(5,500,000) $
(2,800,000) $
(1,500,000) $

(5,500,000)
(2,800,000)
(1,500,000) $

(1,500,000)

$ (9,800,000) $

(9,800,000) $

(9,800,000) $

(9,800,000) $

(1,500,000)

$ 3,200,000 $
$ (1,280,000) $

3,200,000 $
(1,280,000) $

3,200,000 $
(1,280,000) $

3,200,000 $
(1,280,000) $

(1,500,000)
600,000

1,920,000 $

(900,000)

$ 1,920,000 $

1,920,000

1,920,000

$ 1,950,000 $
$ (825,000) $
$ 1,125,000 $

1,950,000 $
(825,000) $
1,125,000 $

1,950,000 $
(825,000) $
1,125,000 $

1,950,000
(825,000)
1,125,000

$ (1,125,000) $
$ 1,500,000 $

1,500,000

$
$

1,500,000

$
$

$
1,500,000 $

1,125,000
1,500,000

$ (7,500,000) $ 2,295,000 $

3,420,000

3,420,000

3,420,000 $

1,725,000

$ (7,500,000) $ 2,049,107 $
$ 2,862,082

2,726,403

2,434,288

2,173,472

$ (7,500,000)

978,811

t account for the final depreciation charge in the 5th year.

ash flows as long as long as the firm has other profitable projects

13.
14.
14.
15.
15.
16.
16.
17.

80
85
90
95
100
105
110
115
120

$
$
$
$
$
$
$
$
$
$

2,862,082
5,522,474
5,079,076
4,635,677
4,192,278
3,748,879
3,305,481
2,862,082
2,418,683
1,975,284

$10,000,000
$5,000,000

30,000

25,000

20,000

10,000

$(5,000,000)

15,000

$5,000

$(10,000,000)
$(15,000,000)

220

$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$$(1,000,000)
$(2,000,000)
$(3,000,000)
$(4,000,000)
$(5,000,000)

210

NPV as function of wholes

200

2,862,082
(4,232,298)
(3,345,501)
(2,458,703)
(1,571,906)
(685,108)
201,689
1,088,487
1,975,284
2,862,082
3,748,879
4,635,677

$15,000,000

$
$
$
$
$
$
$
$
$
$
$
$

NPV as function of sa

190

180
190
200
210
220
230
240
250
260
270
280

2,862,082
(10,439,881)
(9,109,685)
(7,779,489)
(6,449,292)
(5,119,096)
(3,788,900)
(2,458,703)
(1,128,507)
201,689
1,531,886
2,862,082
4,192,278
5,522,474
6,852,671
8,182,867
9,513,063

180

0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
55000
60000
65000
70000
75000

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

Wholesale Price

NPV as function of produc

$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000

$2,000,000
$1,000,000
105

100

95

$90

1,531,886
1,088,487
645,088
201,689

85

$
$
$
$

80

125
130
135
140

Production cost
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
16.0%
16.5%
17.0%

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

2,862,082
3,668,864
3,527,696
3,389,302
3,253,611
3,120,554
2,990,066
2,862,082
2,736,539
2,613,378
2,492,539
2,373,965
2,257,602
2,143,395
2,031,293
1,921,245
1,813,202
1,707,117

NPV as function of W
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5%

Production cost

75,000

70,000

65,000

60,000

55,000

50,000

45,000

40,000

35,000

30,000

as function of sales

Units sold

Wholesale Price

nction of production cost

280

270

260

250

240

230

220

nction of wholesale price

140

135

130

125

120

115

110

105

Production cost

as function of WACC

12.5% 13.0% 13.5% 14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 17.0%

Production cost

tax rate
WACC
the market value of old machine

40%
10%
$

Item
1. Sell old machine
depreciation
book value today
the market value
tax paid
net proceedings from selling the old machine

70,000
Formula

=130,000/13 = 10,000
=130,000 - (130,000/13)*3 = 100,000
=70,000
=0.4*(70000-100000)=-12000
=70,000 + 12000

2. Incremental Earnings
New machine
Old machine
Increase in depreciation
Cost of three engineers

=(150000-5000)/10 - 10000 = 4500

Incremental EBIT
tax, 40%
Incremental Earnings
3. Incremental cash flow
Change in Net Working Capital
Add back increase in Depreciation
Purchase Equipment
Salvage value
Incremental Free Cash Flow
Present Value of FCF
NPV

=5000

Year

82,000

$ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000

$ (25,000) $ (25,000) $ (25,000) $ (25,000) $ (25,000) $ (25,000) $ (25,000) $ (25,000)
$ (4,500) $ (4,500) $ (4,500) $ (4,500) $ (4,500) $ (4,500) $ (4,500) $ (4,500)
$
$
$
$
$
$
$
$
$
$

10,500 $ 10,500 $ 10,500 $ 10,500 $ 10,500 $ 10,500 $ 10,500 $ 10,500

(4,200) $ (4,200) $ (4,200) $ (4,200) $ (4,200) $ (4,200) $ (4,200) $ (4,200)

6,300 $

6,300 $

6,300 $

6,300 $

6,300 $

6,300 $

6,300 $

6,300

5,000 $
$
$ (150,000)

$
4,500 $

$
4,500 $

$
4,500 $

$
4,500 $

$
4,500 $

$ (5,000) $
4,500 $ 4,500 $

4,500

(63,000) $

$
$

(63,000) $
2,723

10,800 $ 10,800 $ 10,800 $ 10,800 $ 10,800 $ 10,800 $

9,818

8,926

8,114

7,377

6,706

6,096

5,800 $ 10,800
2,976

5,038

10

$ 40,000 $ 40,000
$ (25,000) $ (25,000)
$ (4,500) $ (4,500)
$
$
$ 10,500 $ 10,500
$ (4,200) $ (4,200)
$

6,300 $

6,300

$
$

$
4,500 $

4,500

5,000

$ 10,800 $ 15,800
$

4,580

6,092

Sales forecast (units per year)

Product life (years)
Expected wholesale price ($ unit)
Production cost ($ unit)
Selling, General and Administrative Costs ($ per year)
New equipment cost ($)
Years of depreciation
tax rate
Receivables (% of sales)
Payables (% of COGS)
WACC
Item

50,000
4
260
110
2,800,000
7,500,000
5
40%
15%
15%
12%
Formula

Incremental Revenue

=50000*260

Production Costs
Selling, General and Administrative Costs
Depreciation

=-50000*110
=-7500000/5

Incremental Cost
Incremental EBIT
Tax, 40%

=EBIT*40%

Incremental Earnings
Receivables
Payables
Net Working Capital
Change in Net Working Capital
Add back Depreciation
Selling the equipment
Incremental Free Cash Flow
WACC = 12%
Present Value of FCF
NPV

=15%*Sales
=15%*COGS

=7500000-7500000/5*1

Year

1
$ (13,000,000) $

(13,000,000) $

(13,000,000)

$
$
$

5,500,000 $
2,800,000 $
1,500,000 $

5,500,000
2,800,000
1,500,000

$
$
$

5,500,000
2,800,000
1,500,000

1,500,000

9,800,000 $

9,800,000

9,800,000

1,500,000

$ (3,200,000) $
$ 1,280,000 $

(3,200,000) $
1,280,000 $

(3,200,000) $
1,280,000 $

1,500,000
(600,000)

$ (1,920,000) $

(1,920,000) $

(1,920,000) $

900,000

$ (1,950,000) $
$
825,000 $
$ (1,125,000) $

(1,950,000) $
825,000 $
(1,125,000) $

(1,950,000) $
825,000 $
(1,125,000) $

$ 1,125,000 $
$ (1,500,000) $

$
(1,500,000) $

$
(1,500,000) $

(1,125,000)
(1,500,000)

$ (2,295,000) $

(3,420,000) $

(3,420,000) $

(1,725,000)

$ 6,000,000 $ (2,049,107) $
$ (2,306,067)

(2,726,403) $

(2,434,288) $

(1,096,269)

$ 6,000,000
$ 6,000,000

Units
Whole sale price
Cost per unit
Capital expenditures
Years
Revenue
COGS
SG&A

50,000.00
260.00
110.00
(7,500,000.00)
1
13,000,000.00
(5,500,000.00)
(2,800,000.00)
(1,500,000.00)
3,200,000.00
(1,280,000.00)

2
13,000,000.00
(5,500,000.00)
(2,800,000.00)
(1,500,000.00)
3,200,000.00
(1,280,000.00)

Incremental Earnings

1,920,000.00

1,920,000.00

Recievables (15%)
Payables (15%)
Net working capital

1,950,000.00
(825,000.00)
1,125,000.00

1,950,000.00
(825,000.00)
1,125,000.00

1,920,000.00
1,500,000.00
(1,125,000.00)
2,295,000.00

1,920,000.00
1,500,000.00
3,420,000.00

2,049,107.14

2,726,403.06

EBIT
Tax rate (40%)

40%

EBIT(1-T)
Depreciation
+Change in Net working Capital
WACC
NPV

12%
(7,500,000.00)
2,862,081.81

1.) Tax rate lowering makes NPV higher

2.) Product life infinite makes NPV higher since you're creating value every 5 years
3.) Would lower NPV due to losing value and losing out on debt
4.) CHECK, does opportunity cost play a part, sunk costs too? Interesting

3
13,000,000.00
(5,500,000.00)
(2,800,000.00)
(1,500,000.00)
3,200,000.00
(1,280,000.00)

4
13,000,000.00
(5,500,000.00)
(2,800,000.00)
(1,500,000.00)
3,200,000.00
(1,280,000.00)

1,920,000.00

1,920,000.00

1,950,000.00
(825,000.00)
1,125,000.00

1,950,000.00
(825,000.00)
1,125,000.00

1,920,000.00
1,500,000.00
3,420,000.00

1,920,000.00
1,500,000.00
3,420,000.00

(900,000.00)
1,500,000.00
1,125,000.00
1,725,000.00

2,434,288.45

2,173,471.83

978,811.33

(1,500,000.00)
(1,500,000.00)
600,000.00
(900,000.00)
-

Units
Price
Cost

50,000.00
260.00
110.00
1

13,000,000.00
(5,500,000.00)
(2,800,000.00)
(1,500,000.00)
3,200,000.00
(1,280,000.00)
1,920,000.00

13,000,000.00
(5,500,000.00)
(2,800,000.00)
(1,500,000.00)
3,200,000.00
(1,280,000.00)
1,920,000.00

13,000,000.00
(5,500,000.00)
(2,800,000.00)
(1,500,000.00)
3,200,000.00
(1,280,000.00)
1,920,000.00

Receivables
Payables
NWC
Change in NWC

1,950,000.00
(825,000.00)
1,125,000.00
(1,125,000.00)

1,950,000.00
(825,000.00)
1,125,000.00
0.00

1,950,000.00
(825,000.00)
1,125,000.00
0.00

EBIT(1-T)
Change in NWC
Depreciation
FCF

1,920,000.00
(1,125,000.00)
1,500,000.00
2,295,000.00

1,920,000.00
0.00
1,500,000.00
3,420,000.00

1,920,000.00
0.00
1,500,000.00
3,420,000.00

2,049,107.14

2,726,403.06

2,434,288.45

Facility
Sales
COGS
SG&A
Depreciation
EBIT
Taxes - 40%
Earnings

WACC - 12%

0
(7,500,000.00)

12%
(7,500,000.00)

NPV

2,862,081.81

13,000,000.00
(5,500,000.00)
(2,800,000.00)
(1,500,000.00) (1,500,000.00)
3,200,000.00 (1,500,000.00)
(1,280,000.00)
600,000.00
1,920,000.00
(900,000.00)
1,950,000.00
(825,000.00)
1,125,000.00
0.00

0.00
0.00
0.00
1,125,000.00

1,920,000.00
0.00
1,500,000.00
3,420,000.00

(900,000.00)
1,125,000.00
1,500,000.00
1,725,000.00

2,173,471.83

978,811.33

machine
mkt value
deprc
3yrs
Tax benefit

(130,000.00)
70,000.00
(10,000.00)
(100,000.00)
12000

new machine 150,000.00

new depr
14,500.00

0
(150,000.00)
82,000.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

5,000.00
-

5,000.00
-

5,000.00
-

6,300.00
4,500.00

6,300.00
4,500.00

6,300.00
4,500.00

(63,000.00)

10,800.00

10,800.00

10,800.00

(63,000.00)

9,818.18

8,925.62

8,114.20

New machine
Sell machine
New GM
Old GM
Engr costs
Depreciation increase
EBIT
Tax - 40%
Earnings
NWC
Change in NWC
EBIT(1-T)
Change in NWC
Deprc
Salvage value
FCF
WACC -10%
10%
NPV

5,000.00
5,000.00

2,723.25

10

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

40,000.00
(25,000.00)
(4,500.00)
10,500.00
(4,200.00)
6,300.00

5,000.00
-

5,000.00
-

5,000.00
-

(5,000.00)

6,300.00
4,500.00

6,300.00
4,500.00

6,300.00
4,500.00

6,300.00
(5,000.00)
4,500.00

6,300.00
4,500.00

6,300.00
4,500.00

10,800.00

10,800.00

10,800.00

5,800.00

10,800.00

10,800.00

6,300.00
4,500.00
5,000.00
15,800.00

7,376.55

6,705.95

6,096.32

2,976.32

5,038.28

4,580.25

6,091.58

Facility
Sales
COGS
SG&A
Depreciation
EBIT
Taxes - 40%
Earnings

0
6,000,000.00

(13,000,000.00) (13,000,000.00) (13,000,000.00)

5,500,000.00
5,500,000.00
5,500,000.00
2,800,000.00
2,800,000.00
2,800,000.00
1,500,000.00
1,500,000.00
1,500,000.00
(3,200,000.00) (3,200,000.00) (3,200,000.00)
1,280,000.00
1,280,000.00
1,280,000.00
(1,920,000.00) (1,920,000.00) (1,920,000.00)

Receivables
Payables
NWC
Change in NWC

(1,950,000.00)
825,000.00
1,125,000.00
1,125,000.00

(1,950,000.00)
825,000.00
1,125,000.00
0.00

(1,950,000.00)
825,000.00
1,125,000.00
0.00

EBIT(1-T)
Change in NWC
Depreciation
FCF

(1,920,000.00)
1,125,000.00
(1,500,000.00)
(2,295,000.00)

(1,920,000.00)
0.00
(1,500,000.00)
(3,420,000.00)

(1,920,000.00)
0.00
(1,500,000.00)
(3,420,000.00)

(2,049,107.14)

(2,726,403.06)

(2,434,288.45)

WACC - 12%

12%
6,000,000.00

NPV

(2,306,067.34)

1,500,000.00
1,500,000.00
(600,000.00)
900,000.00
(1,950,000.00)
825,000.00
(1,125,000.00)
900,000.00
(1,125,000.00)
(1,500,000.00)
(1,725,000.00)

(1,096,268.69)

investment
annual cf
market risk
risk-free
corp tax
beta

10,000,000.00
1,300,000.00
7.00%
2.00%
35.00%
1.70

Equity cost

13.90000%

Equity only use the cost of equity

NPV

(10,000,000.00)

13.90000%
1
1,300,000.00
9,352,517.99

(647,482.01)
Use same wacc - underlying riskiness of business remains same
No - company should use Bu and Wacc that corresponds to risk of project
cost of debt
split
Beta(L)

2.0%
50%
2.805

cost of equity

21.63500%

WACC

11.46750%

FCF

(10,000,000.00)

NPV

(10,000,000.00)
1,336,385.44

1.00
1,300,000.00
11336385.44

2008

2009

2010
10%
21,120,000,000.00
2,112,000,000.00
(506,880,000.00)
1,605,120,000.00

2011
9.00%
23,020,800,000.00
2,302,080,000.00
(552,499,200.00)
1,749,580,800.00

Change in NWC

(192,000,000.00)

(190,080,000.00)

EBIT(1-T)
Change in NWC
FCF

1,605,120,000.00
(192,000,000.00)
1,413,120,000.00

1,749,580,800.00
(190,080,000.00)
1,559,500,800.00

WACC - 10%

1,284,654,545.45

1,288,843,636.36

sales
EBIT
Capex/Deprc
Tax 24%
Earnings

19,200,000,000.00

Enterprise
Cash
Debt
Equity value

32,542,444,954.48
2,300,000,000.00
(32,000,000.00)
34,810,444,954.48

Shares outstanding
Price

486,000,000
$

71.63

2012
8.00%
24,862,464,000.00
2,486,246,400.00
(596,699,136.00)
1,889,547,264.00

2013
7.00%
26,602,836,480.00
2,660,283,648.00
(638,468,075.52)
2,021,815,572.48

2014
6.00%
28,199,006,668.80
2,819,900,666.88
(676,776,160.05)
2,143,124,506.83

2015 TV
5.00%
29,608,957,002.24
2,960,895,700.22
(710,614,968.05)
2,250,280,732.17

(184,166,400.00)

(174,037,248.00)

(159,617,018.88)

(140,995,033.34)

1,889,547,264.00
(184,166,400.00)
1,705,380,864.00

2,021,815,572.48
(174,037,248.00)
1,847,778,324.48

2,143,124,506.83
(159,617,018.88)
1,983,507,487.95

2,250,280,732.17
(140,995,033.34)
2,109,285,698.83

1,281,277,884.30

1,262,057,458.15

1,231,602,093.71

26,194,009,336.50

44,294,999,675.35

WACC
Beta
YTM Debt
Debt
Equity
Risk-free
Market-risk P
Tax rate

0.5
6%
18%
82%
3%
5%
30%

Equity return

5.500%

WACC

5.26600%

New beta
New cost of equity
WACC

0.61
6.05%
5.71600%

Capital Budgeting
0
New Sales
Old Sales
Incr in cost
Kitchens
Depreciation
EBIT
Tax rate - 30%
Earnings
NWC
Change in NWC

1
3.50
(2.50)
(0.75)

2
3.00
(2.00)
(0.70)

3
2.50
(1.50)
(0.65)

4
2.00
(1.00)
(0.40)

(0.05)
0.20
(0.06)
0.14

(0.05)
0.25
(0.08)
0.18

(0.05)
0.30
(0.09)
0.21

0.60
(0.18)
0.42

0.35
(0.05)

0.30
0.05

0.25
0.05

0.20
0.05

0.14
0.05
(0.05)
0.14

0.18
0.05
0.23

0.21
0.05
0.26

0.42
0.05
0.47

10%

0.13

0.19

0.20

0.32

(0.45)
0.06

0.13

0.19

0.20

0.32

(0.15)

0.30
(0.30)

EBIT(1-T)
Deprc
Change in NWC
FCF
WACC

NPV
Valuation

0
Sales
EBIT
Tax rate - 24

24,000,000,000.00
2,400,000,000.00
(576,000,000.00)

1
5%
25,200,000,000.00

EBIT(1-T)
Change in NWC
CapEx/Deprc
FCF

1,824,000,000.00
(120,000,000.00)
1,704,000,000.00

Enterprise Value
Cash
Debt
Mkt value

34,080,000,000.00
3,300,000,000.00
(364,000,000.00)
37,016,000,000.00

Shares
Price

453,000,000
$

81.71

5
1.00
(1.00)
(0.40)

(0.40)
0.12
(0.28)
0.10
0.10
(0.28)
(0.28)
(0.17)
(0.17)