In Class 11-27 Problem

In Class Problem - Student Version

Current Asset Book Value

Purchase price
Accumulated depreciation

Book Value

Initial Investment Axminster Loom

+Installed cost of new asset

Cost of new asset
+ Installation costs
Total cost of new asset

-After-tax proceeds from sale of current asset

Proceeds from sale of current asset
-Removal cost of current asset
Net proceeds from sale of current asset
-+ Tax on sale of current asset
Proceeds sale of current asset after tax
-+ Change in net working capital

Initial investment

Percentage by
Depreciation Table recovery year
Year 7 Years
1 14%
2 25%
3 18%
4 12%
5 9%
6 9%
7 9%
8 4%

Axminster Loom Cash Flows 1 2

Profits before depreciation and taxes
Depreciation
Net profits before taxes
Taxes
Net profits after taxes
Operating cash inflows

Current Loom Cash Flows 1 2

Profits before depreciation and taxes
Depreciation
Net profits before taxes
Taxes
Net profits after taxes
Operating cash inflows

Calculation of Incremental Cash In Flows 1 2

Axminster Loom Cash Flows
Current Loom Cash Flows
Incremental Axminster Loom

Axminster Asset Book Value

Purchase price
Accumulated depreciation

Book Value

Current Asset Book Value

Purchase price
Accumulated depreciation

Book Value

Terminal Cash Flow

+After-tax proceeds from sale of new asset

 Proceeds from sale of new asset
-+Tax on sale of new asset
Total proceeds from sale of new asset

-After-tax proceeds from sale of current asset

Proceeds from sale of current asset
-+ Tax on sale of current asset
Proceeds sale of current asset after tax
-+ Change in net working capital

Terminal Cash Flow

Time Line Pre After Tax and Depreciation

0 1 2

Initial Investment
 Year
3 4 5 6 7 8
3 4 5 6 7 8

3 4 5 6 7 8
3 4 5 6 7 8
Incremental Cash Flows
Terminal Cash Flow
Incremental Cash Flows
Terminal Cash Flow
In Class Problem - Expansion

Projected Hydro Forming Sales

Year Sales
1 $ 2,599,322
2 $ 2,859,254
3 $ 3,145,180
4 $ 3,459,698
5 $ 3,805,667
6 $ 4,186,234
7 $ 4,604,857
8 $ 5,065,343
9 $ 5,571,878
10 $ 6,129,065

Cost of Sales as percentage of sales 70%

General and administrative expenses as a

percentage of sales 10%

Percentage by
Depreciation Table recovery year
Year 5 Years
1 20%
2 32%
3 19%
4 12%
5 12%
6 5%

Initial Investment Hydro Forming Expansion

+Installed cost of facility and equipment

Cost of new asset
+ Installation costs
Total cost of new asset

-After-tax proceeds from sale of current asset

Proceeds from sale of current asset
-Removal cost of current asset
Net proceeds from sale of current asset
 -+ Tax on sale of current asset
Proceeds sale of current asset after tax
-+ Change in net working capital

Initial investment

Hydro Forming Expansion 1

Sales
Cost of Goods Sold
General & Administrative Expenses

Profits before depreciation and taxes

Depreciation
Net profits before taxes
Taxes
Net profits after taxes
Operating cash inflows

Hydro Forming Expansion Book Value

Purchase price
Accumulated depreciation

Book Value

Terminal Cash Flow

+After-tax proceeds from sale of new asset

Proceeds from sale of new asset
-+Tax on sale of new asset
Total proceeds from sale of new asset

-After-tax proceeds from sale of current asset

Proceeds from sale of current asset
-+ Tax on sale of current asset
Proceeds sale of current asset after tax
-+ Change in net working capital
Terminal Cash Flow

Time Line Pre After Tax and Depreciation

0 1

Initial Investment
 Year
2 3 4 5 6 7
2 3 4 5 6 7
8 9 10
8 9 10
Incremental Cash Flows
Terminal Cash Flow
Current Book Value Current Press

Purchase price
Accumulated depreciation

Book Value

Percentag
e by
recovery
Depreciation Table year
Year 7 Years
1 20%
2 32%
3 19%
4 12%
5 12%
6 5%

Initial Investment New Press

+Installed cost of new asset

Cost of new asset
+ Installation costs
Total cost of new asset

-After-tax proceeds from sale of current asset

Proceeds from sale of current asset
-Removal cost of current asset
Net proceeds from sale of current asset
-+ Tax on sale of current asset
Proceeds sale of current asset after tax
-+ Change in net working capital

Initial investment

Year
New Press Incremental Cash Flows 1 2 3
Revenue increase
Cost of Sales increase
Gross Profit increase
General and Administrative Expense increase
Profits before depreciation and taxes
Depreciation
Net profits before taxes
Taxes
Net profits after taxes
Operating cash inflows

New Press Book Value

Purchase price
Accumulated depreciation

Book Value

Current Press Book Value

Purchase price
Accumulated depreciation

Book Value

Terminal Cash Flow

+After-tax proceeds from sale of new asset

Proceeds from sale of new asset
-+Tax on sale of new asset
Total proceeds from sale of new asset

-After-tax proceeds from sale of current asset

Proceeds from sale of current asset
-+ Tax on sale of current asset
Proceeds sale of current asset after tax
-+ Change in net working capital

Terminal Cash Flow

Time Line Pre After Tax and Depreciation

 0 1 2 3

Initial Investment
Year
4 5 6
4 5 6
Incremental Cash Flows
Terminal Cash Flow