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Dry  Cleaner  Example  

A   dry   cleaner   is  
looking   to   replace   an  
old   laundry   machine  
with  a  bigger  one.    

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The   cost   of   new   machine   is   $3000   and   shipment   cost   is   $200.  This  
will   reduced   working   capital   by   $500.  The   old   machine   can   be   sold  
for  $1000  and  generate  $500  in  profit.  (Tax  rate  is  40%)  
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The   new   laundry   machine   will   generate   an   additional   $1400   a   year  
and   it   will   add   additional   cost   of   $200.   The   total   cost   of   the   new  
machine   ($3200)   will   be   depreciated   over   4   years     (Salvage   value  
after  4  years  will  be  $400).  (Tax  rate  is  40%)  
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The  new  laundry  machine  can  be  sold  after  4  years  for  $900  (Book  
value   will   be   $400).  This   increase   the   working   capital   by   $500   (Tax  
rate  is  40%).  
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Required  rate  of  return,  Discount  Rate  or  Cost  of  Capital  is  8%  over  4  years  

P r e s e n t  V a l u e   A n n u i t y  Ta b l e  

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Required  rate  of  return,  Discount  Rate  or  Cost  of  Capital  is  8%  over  4  years  

P r e s e n t  V a l u e  Ta b l e   o f   a   S i n g l e   F u t u r e   A m o u n t  

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 9.5%

P r e s e n t  V a l u e   A n n u i t y  Ta b l e  

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 NPV   IRR  

Measure   $  Amount     %  of  return  

Consider  Time  value  

of  Money  

Evaluate  projects  
with  different  
required  rate  of  
returns    
Discount  rate/  
Reinvestment  rate    
Required  rate  of   IRR  rate  
return  
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Which  project  would  you  select?  

Invest  $1                  Get  $2 NPV  =  $1    

Invest  $100 Get  $150 NPV  =  $50

The  project  with  greatest  NPV  not  largest  IRR  

will  add  more  value  to  the  company  

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Simple  Payback  Method:  
     -­‐  Even  cash  flows:  

     -­‐  Uneven  cash  flows:    

Discounted  Payback  Method:  

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Ignore  Time                            Ignore  cash  flow                                    Biased  toward    
Value  of  Money              beyond  cutoff  date            Short-­‐term  Projects  
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120 (12%)

90 (9.2%)
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