Calculating cash flows, after-tax salvage value, NPV and IRR

Input Data from the case:

Equipment cost
Shipping charge
Installation charge
Economic Life
Salvage Value
Tax Rate
Cost of Capital
Units Sold
Sales Price Per Unit
Incremental Cost Per Unit
Inventory/sales
Inflation rate

a. Prepare a depreciation schedule. What is Shrieves' depreciable basis? What are the annual depreciation expenses?

Annual Depreciation Expense Schedule

Depreciable Basis =

Year % x Basis = Depr. Exp Remaining Book Value
1st
2nd
3rd
4th

b. Construct annual incremental operating cash flow statements.

Annual Operating Cash Flows
1st Year 2nd Year 3rd Year 4th Year
Units
Unit price
Unit cost

Sales
Costs
Depreciation
Operating income before taxes (EBIT)
Taxes (40%)
Net operating profit after taxes
Depreciation
Net Operating Cash Flow (CF)

c. Estimate the required net operating working capital for each year, and the cash flow due to investments in net operating working capital.

Annual Cash Flows due to Investments in Net Operating Working Capital (NOWC)

Present Period (0) 1st Year 2nd Year 3rd Year 4th Year
Sales
NOWC (% of sales) required
CF (required) due to investment in NOWC

d. Calculate the after-tax salvage cash flow.

After-tax Salvage Value
Based on facts in case:
Salvage Value
Book value
Gain or loss
Tax on Salvage Value
Net Terminal Cash Flow (Salvage CF)

e. Calculate the net cash flows for each year. Based on these cash flows, what are the project's NPV and IRR? Do these indicators suggest that the project should be undertaken?

Projected Net Cash Flows

Present Period (0) 1st Year 2nd Year 3rd Year 4th Year
Investment Outlay: Long Term Assets
Net Operating Cash Flow (CF)
CF (required) due to investment in NOWC
Salvage Cash Flows
Net Cash Flows

NPV
IRR

Attachments

Solution Summary

This solution is comprised of detailed calculation using excel of annual cash flows, after-tax salvage value of the asset, projected net cash flows, the net present value (NPV), and internal rate of return (IRR).