Minimum or Lowest Acceptable Rate of Return

Net Initial Investment or Project Cost

Initial cash outlay
Additional cash outlay related to the
Add:
asset
Additional working capital
Total
Cash inflow arising from sale of old
Less:
asset being replaced
Avoidable costs
Net investment

xx
xx

xx
xx

Annual incremental revenue from the project

Less: Incremental cash operating costs
Annual cash inflow before taxes
Less: Taxes
[Tax rate (Annual cash inflow before
taxes - Depreciation)]
Annual net cash inflow after taxes

xx
xx

Cost of Preferred Shares

Dividends per share
MV per share of Preferred Share

xx
xx
xx

xx
xx

Annual incremental revenue from the project

Less: Incremental cash operating costs
Annual cash inflow before taxes
Less: Incremental depreciation
Net income before taxes
Less: Income taxes
Net income after taxes
Add: Incremental depreciation
Annual net cash inflow after taxes

xx
xx
xx
xx
xx
xx
xx
xx
xx

Cost of Common Stock

A. Stock price-based
Expected Cash Dividends per share
Current price per share of common stock

xx
xx
xx

xx
xx

1
Payback Period

+ Dividend Growth Rate

Cost of Retained Earnings

Same as cost of common equity

Payback Period
Net Investment
Annual cash returns

Accounting Rate of Return or Simple

Rate of Return

Cost savings - Depreciation of

new equipment
Investment

ARR on Average Initial Investment

xx
xx
xx
xx
xx
xx
xx
xx
xx

Net Present Value

Present value of cash inflows computed
based on minimum desired discount rate
Less: Present value of investment
Net Present Value

xx
xx
xx

Annual Cash Inflows

Net investment
OR

B. Book value-based
Next year's projected EPS
Current price per share of common stock

Average Investment = Initial Investment + Salvage Value at end of life

2

Payback Reciprocal
Payback Reciprocal =

Average Annual Net Income

Investment

Net Cash Returns (cash savings)

Cash operating costs (if the old asset

or method is used)
Less: Annual cash operating costs (if the new asset
or method is used)
Cash savings before taxes
Less: Incremental depreciation
Increase in income before taxes
Less: Income taxes
Increase in income after taxes
Add: Incremental depreciation
Net cash savings after taxes

Cost of debt
Interest rate (1 - Corporate Tax Rate)

xx
xx

Net Cash Returns

Annual cash operating costs (if the old asset

or method is used)
Annual cash operating costs (if the new
Less:
asset or method is used)
Annual cash savings before taxes
Less: Taxes
[Tax rate (Annual cash inflow before
taxes - Incremental depreciation)]
Annual cash savings after taxes

xx

Profitability Index

PV Index =

PV of Cash Inflows
PV of Net Investment