$000

0 1 2 3 4
Sales
VC
FC
Pre-tax Cashflows
Less tax
Tax Benefit on CA
Working Capital
Scrap Value
Initial Investment
Net Cashflows
Discount Factors
Present Values

NPV
Sales
Cost of Sales
Distribution costs
Pre-tax Cashflows
Joint Venture Pay
Working Capital
Scrap Value
Initial Investment
Net Cashflows
Discount Factors
Present Values

NPV($000)
NPV($000)
IRR

Payback Period
Year
0
1
2
3
4
 $000
0 1 2 3 4 5 6
$ 1,550 $ 1,550 $ 1,550 $ 650 $ 650
$ (620) $ (620) $ (620) $ (260) $ (260)
$ (155) $ (155) $ (155) $ (65) $ (65)
$ - $ 775 $ 775 $ 775 $ 325 $ 325
$ (155) $ (155) $ (155) $ (65) $ (65)

$ (2,100)
$ (2,100) $ 775 $ 620 $ 620 $ 170 $ 260 $ (65)
$ 1.000 $ 0.952 $ 0.907 $ 0.864 $ 0.823 $ 0.784 $ 0.746
$ (2,100) $ 738 $ 562 $ 536 $ 140 $ 204 $ (49)

$ 31
$ 31
5.70%

C.C.F
$ (2,100)
$ (1,325)
$ (705)
$ (85) 3.5 Years
$ 85
 0 1 2 3 4 5 6
Sales $ 1,600 $ 1,600 $ 1,600 $ 1,600 $ 1,600
Less: VC $ (1,100) $ (1,100) $ (1,100) $ (1,100) $ (1,100)
FC $ (160) $ (160) $ (160) $ (160) $ (160)
Pre-tax Cashflows $ - $ 340 $ 340 $ 340 $ 340 $ 340
Tax (30%) $ (102) $ (102) $ (102) $ (102) $ (102)
Working Capital $ (90) $ 90
SV $ 40
Initial Investment $ (800)
Net C.F $ (890) $ 340 $ 238 $ 238 $ 238 $ 368 $ (102)
D.F (11%)
PV

NPV (000) $ 104

IRR 15.86%
Sales
Less:VC
Pre-Tax Cashflows
Less: Tax
Add: Tax Benefit on CA
Working Capital
Initial Investment
Scrap Value
Net Cashflows
D.F
Present Values

NPV ($000)
IRR
 $000
- 1 2 3 4
$ 728 $ 1,146 $ 1,687 $ 842
$ (441) $ (701) $ (1,042) $ (525)
$ - $ 287 $ 445 $ 645 $ 317
$ (86) $ (134) $ (194) $ (95)
$ 75 $ 75 $ 75 $ 75
$ (51) $ (29) $ (38) $ 59 $ 59 $ (118) $ 59
$ (1,000)

$ (1,051) $ 247 $ 349 $ 586 $ 356

$ 1.000 $ 0.893 $ 0.797 $ 0.712 $ 0.636
$ (1,051) $ 220 $ 278 $ 417 $ 226

$ 91
16%
Solution:
0
Sales
Less: VC
FC
Operating Cashflows $ -
Initial Investment $ (2,000)
SV
Net Cashflows $ (2,000)
D.F $ 1.000
PV $ (2,000)

NPV ($000) 368

Comment: We should accept this project as it has

IRR 18%

Discounted Payback Period

Year C.F
0 $ (2,000)
1 $ 560
2 $ 696
3 $ 1,351
4 $ 393
 $000
1 2 3 4
$ 1,236 $ 1,485 $ 2,623 $ 1,013
$ (499) $ (606) $ (1,080) $ (421)
$ (177) $ (184) $ (191) $ (199)
$ 560 $ 696 $ 1,351 $ 393

$ 560 $ 696 $ 1,351 $ 393

$ 0.909 $ 0.826 $ 0.751 $ 0.683
$ 509 $ 575 $ 1,015 $ 268

ccept this project as it has a positive NPV

D.F P.V C.C.F

1.000 $ (2,000) $ (2,000)
0.909 $ 509 $ (1,491)
0.826 $ 575 $ (916) 2.9 Years
0.751 $ 1,015 $ 99
0.683 $ 268
Ke 11% 80% 8.80%
kd 6% 20% 1.20%
10%
Solution: $000
0 1 2 3 4 5
Sales $ 3,200 $ 4,000 $ 4,800 $ 4,800
VC $ (2,760) $ (3,450) $ (4,140) $ (4,140)
FC $ (240) $ (260) $ (280) $ (300)
Net Operating Cashflows $ - $ 200 $ 290 $ 380 $ 360 $ -
Less: Tax $ (60) $ (87) $ (114) $ (108)
Tax Benefit on CA $ 60 $ 45 $ 34 $ 92
Initial Investment $ (800)
SV $ 30
Net Cashflows $ (800) $ 200 $ 290 $ 338 $ 310 $ (16)
D.F (10%) $ 1.000 $ 0.909 $ 0.826 $ 0.751 $ 0.683 $ 0.621
PV $ (800) $ 182 $ 240 $ 254 $ 212 $ (10)

NPV ($000) $ 77 $ 877

Cost of Capital 10%
After Tax cost of Debt 6.02%
Tax Benefit on CA Benefit Payment
Cost $ 800
Less: CA $ (200) $ (60) Year 2
Written down value(1) $ 600
Less: CA $ (150) $ (45) Year 3
WDV (2) $ 450
Less: CA $ (113) $ (34) Year 4
WDV (3) $ 338
Less: SV $ (30)
Balancing Allowance $ 308 $ (92) Year 5
Allowed as an expense
 $000
0 1 2 3 4
Sales $ 3,750 $ 1,680 $ 1,380 $ 1,320
Less: VC $ (1,710) $ (798) $ (684) $ (684)
FC $ (600) $ (600) $ (600) $ (600)
Advertisement $ (650) $ (100)
Net Operating Cashflows $ - $ 790 $ 182 $ 96 $ 36
Tax (30%) $ (237) $ (55) $ (29) $ (11)
Tax Benefit on CA $ 60 $ 60 $ 60 $ 60 straight line
Initial Investment $ (800)
SV $ -
Net Cashflows $ (800) $ 613 $ 187 $ 127 $ 85
D.F (10%) $ 1.000 $ 0.909 $ 0.826 $ 0.751 $ 0.683
PV $ (800) $ 557 $ 155 $ 96 $ 58

NPV ($000) 66
Comment: We should accept this project as it has a positive NPV

Fixed cost does not change with the change in activity levels.
Real vs Nominal: Inflation 3%

year 0 Year 1 11000 Nominal Cashflow

$ 10,000.00 $ 11,000.00 10.00% Nominal $ 10,680 Real Cashflow (Current Price Terms)

$ 10.00 $ 10.30

1000 1067.96

6.80% 10.00%
Real Nominal
Sales $ 10,000 $ 10,300
VC $ -6,000 $ -6,180
Net C.F $ 4,000 $ 4,120
D.F 0.936 0.909
$ 3,745 $ 3,745

Y1 (Real) Y2 (Nominal)
Sales 15000 15450
Less: VC 10000 10300
Net Cashflows 5000 5150
DF 0.936 0.909
PV 4682 4682
 PV
10000

flow (Current Price Terms)

$ 10,679.61
 0
Sales
Less:VC
FC
Pre-Tax C.F $ -
Less: Tax (30%)
Add: tax benefit (CA)
Initial Investment
SV
Net Cashflow
D.F
PV
NPV (000)
NPV (000)
(1+nominal Rate) = (1+real Rate)x(1+inflation Rate
Nominal Rate

b)
Pre-Tax Cashflows
Less: Depreciation
PBIT

Average Profit (000)

Average Investment
ARR
Target
Comment: Since the ARR is greater than the target
we should accept the project
 000
1 2 3 4 5
$ 433 $ 509 $ 656 $ 338
$ -284 $ -337 $ -439 $ -228
$ -27 $ -28 $ -30 $ -32
$ 122 $ 144 $ 187 $ 78

+real Rate)x(1+inflation Rate)

$ 122 $ 144 $ 187 $ 78

Per Year

ARR is greater than the target therefore

 $000
0 1 2 3 4 5
Sales
VC
Contribution
FC
Pre-Tax C.F
Less: Tax (30%)
Tax Benefit (CA)
SV
Initial Investment
Net C.F
D.F
PV

NPV (000)

Working:
Nominal WACC

(1+Nominal Rate) = (1+real Rate) (1+Inflation rate)

Sales
VC
FC
Pre-Tax C.F
Tax (20%)
Tax Benefit (CA)
Working Capital
Initial Investment
SV
Net C.F
D.F(12%)
PV
NPV (000)
NPV (000)
IRR
 $000
0 1 2 3 4
Solution:
Units
Sales
Less: VC
Contribution
Less: FC
Net C.F

Sensitivity = NPV/After tax PV of Project Variable

Initial Investment
Selling Price
VC/unit
Sales Volume
Cost of Capital
 000 A.F PV
Rate Total

Less: Investment
NPV

er tax PV of Project Variable 19.194736842105300%

(IRR-Cost of Capital)/Cost of Capital

Example:
Sales Volume 5,000 units Per year
Selling Price $ 10.00 Per unit
VC/unit $ 4.00 Per unit
Fixed Costs $ 8,000 Per year
Life 5 years
Initial Investment $ 60,000
Cost of Capital 10%
Tax Rate 20%
Required:
find sensitivity of the project towards (Selling price, Variable Cost, Fixed Costs, Initial Investment,Sales Volume & Cost of Capit

Solution: A.F
Sales 5000 $ 10.00 $ 50,000 3.790787 $ 189,539 Selling Price
Less: VC 5000 $ -4.00 $ -20,000 3.790787 $ -75,816 VC
Contribution $ 30,000 3.790787 $ 113,724 Volume
Less: FC $ -8,000 3.790787 $ -30,326 Fixed Cost
Pre-Tax C.F $ 22,000 3.790787 $ 83,397 Investment
Tax (20%) $ -4,400 3.790787 $ -16,679
Net C.F $ 17,600 3.790787 $ 66,718 Cost of Capital:
Less: Investment $ -60,000 Step 1: Calculate IRR
NPV $ 6,718
NPV at (18%): IRR
Sales 5000 $ 10.00 $ 50,000 3.127171 $ 156,359
Less: VC 5000 $ -4.00 $ -20,000 3.127171 $ -62,543 Sensitivity
Contribution $ 30,000 3.127171 $ 93,815
Less: FC $ -8,000 3.127171 $ -25,017
Pre-Tax C.F $ 22,000 3.127171 $ 68,798
Tax (20%) $ -4,400 3.127171 $ -13,760
Net C.F $ 17,600 3.127171 $ 55,038
Less: Investment $ -60,000
NPV $ -4,962
nvestment,Sales Volume & Cost of Capital

4.43%
11.08%
7.38%
27.69%
11.20%

ost of Capital:
ep 1: Calculate IRR

14.60%

46.01%
Asset Replacement Decision:

LCM:
Replacing After Every 2 years:

Initial Investment
SV
Maintenance Costs
Net C.F
D.F
PV

NPV

Initial Investment
SV
Maintenance Costs
Net C.F
D.F
PV
NPV

Comment: Since replacing the asset after every tw

the optimal replacement cycle is 2 years.

2 Years Replacement Cycle:

Initial Investment
SV
Maintenance Costs
Net C.F
D.F
PV
NPV

EAC = NPV/A.F
Equivalent Annual Cost

3 Years:

Initial Investment
SV
Maintenance Costs
Net C.F
D.F
PV
NPV
EAC
ent Decision:

Every 2 years:

0 1 2 3 4 5 6

replacing the asset after every two years costs less than replacing after 3 years therefore
acement cycle is 2 years.

ment Cycle:
0 1 2

0 1 2 3
Risk & Uncertainty
Frequence Probability
90 20 1800 20%
60 35 2100 35%
20 45 900 45%
100 4800

Expected Marks 48 (Expected Value)

EV 48
Sales
VC
FC
Pre-Tax C.F
Tax (28%)
Tax Benefit (CA)
Net Cashflows
D.F
PV

Working:
Expected VC/unit

NPV (000)
 $000
0 1 2 3 4 5
Lease Or Buy:
Lease Or BUY:
Buy:

Initial Investment
SV
Licence Fee
Tax Saving (License Fee)
Tax Benefit (CA)
Net Cashflows
D.F (6.02%)
PV

After Tax Borrowing Rate

NPV (000)

Lease:
Years
0-3
2-5

Investing Decision:

Savings
Tax(30%)
Net C.F
D.F (11%)
PV

NPV ($000)
 $000
0 1 2 3 4 5

C.F D.F/A.F PV

NPV` ` $ -

$000
0 1 2 3 4 5
 Buy:

Invesment
SV
Maintenance Costs
Tax Savings (Maintenance costs)
Tax Savings (CA)
Net C.F
D.F (7%)
PV
NPV

Lease:
Years Particulars
0-2 Lease Rentals
2-4 Tax Benefit

0
 0 1 2 3 4

(Maintenance costs)

C.F D.F/A.F PV

NPV