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

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

#### 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).