Problem 2-3

PROBLEM 2-3

Given Solution Legend

Growth rate in EBIT for years 1-5 = Value given in problem
EBIT (year 1) = Formula/Calculation/Analysis required
CAPEX for year 0 = Qualitative analysis or Short answer required
Depreciable life of fixed assets years = Goal Seek or Solver cell
Tax rate = Crystal Ball Input
New working capital for years 1-5 of EBIT = Crystal Ball Output

Solution
Year
0 1 2 3 4 5
EBIT
Taxes
NOPAT
Plus: Depreciation
Less: CAPEX
Less: Net working capital needs (See Note 1) Note 1: At the end of year 5 the firm
Plus: Salvage value of the fixed assets in year 5 liquidates all of it's investment in net
Firm Free Cash Flow (FFCF) operating working capital.

Net Fixed Assets (beginning of the year)

Plus: CAPEX
Less: Depreciation Expense for the Year
Net Fixed Assets (end of the year)

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 PROBLEM 2-9

Given Solution Lege

Investment (CAPEX in year 0) = Value given in problem
Depreciable life years = Formula/Calculation/Anal
Initial units for year 1 = Qualitative analysis or Sh
Revenue per unit = Goal Seek or Solver cell
Growth Rate per year in units recycled = Crystal Ball Input
Tax Rate = Crystal Ball Output
Disposal cost per unit
Required Return

Solution: Part a
Year
0 1 2 3 4
Units recycled
Revenues
Depreciation Expense
EBIT
Less: Taxes
NOPAT
Plus: Depreciation expense
Less: CAPEX
Project Free Cash Flows

Solution: Part b

NPV
IRR

Solution: Part c

Year
0 1 2 3 4
Units recycled
Revenues
Depreciation Expense
EBIT
Less: Taxes
NOPAT
Plus: Depreciation expense
Less: CAPEX
Project Free Cash Flows

NPV
IRR

The investment still looks like a good one with a positive NPV and an IRR that exceeds the required return.
 Solution: Part d

Year
0 1 2 3 4
Units recycled
Revenues
Disposal cost
Depreciation Expense
EBIT
Less: Taxes
NOPAT
Plus: Depreciation expense
Less: CAPEX
Project Free Cash Flows

NPV
IRR

Yes, even including the $0.20 per unit in disposal costs the project appears to be worthwhile.
 Solution Legend
Value given in problem
Formula/Calculation/Analysis required
Qualitative analysis or Short answer required
Goal Seek or Solver cell
Crystal Ball Input
Crystal Ball Output

5
5
 Problem 2-10

PROBLEM 2-10

Given Solution Legend

Cost of Tester (Year 0) $ 250,000 = Value given in problem
Installation and training costs $ 10,000 = Formula/Calculation/Analysis required
CAPEX (Year 5) $ 100,000 = Qualitative analysis or Short answer req
Annual cost savings $ 70,000 = Goal Seek or Solver cell
Salvage value $ 5,000 = Crystal Ball Input
Depreciation Straight Line = Crystal Ball Output
Project Life 10 years
Tax rate 30%
Cost of Capital 12%

Solution
a. Year
0 1 2 3 4 5
Investment Outlays
Equipment purchases $ (250,000) $(100,000)
Installation costs (10,000)
Initial Outlay $ (260,000)
After-tax salvage value
Free Cash Flows
Operating Expense Savings $70,000 $70,000 $70,000 $ 70,000 $ 70,000
Less: Depreciation Expense (26,000) (26,000) (26,000) (26,000) (26,000)
Additional Operating Income $44,000 $44,000 $44,000 $ 44,000 $ 44,000
Less: Taxes (13,200) (13,200) (13,200) (13,200) (13,200)
NOPAT $30,800 $30,800 $30,800 $ 30,800 $ 30,800
Plus: Depreciation 26,000 26,000 26,000 26,000 26,000
Less: CAPEX (260,000) - - - - (100,000)
Free Cash Flow $ (260,000) $56,800 $56,800 $56,800 $ 56,800 $ (43,200)

b.
Net Present Value $ 17,590
Internal Rate of Return 13.61%

NPV Profile
Discount Rates NPV
0%
2%
241,500
188,124
NPV Profile
4% 142,825
6% 104,168 300,000
8% 71,000
Net Present Value

10% 42,391 200,000

100,000

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0% 5% 10% 15% 20% 25% 30% 35
(100,000)
 NPV Profile
Problem 2-10 300,000

Net Present Value

200,000
12% 17,590
14% (4,019) 100,000
16% (22,937)
18% (39,577) -
20% (54,279) 0% 5% 10% 15% 20% 25% 30% 35
22% (67,327) (100,000)
24% (78,955)
26% (89,362) (200,000)
28% (98,711)
30% (107,144) Discount Rates
32% (114,777)
34% (121,710)
36% (128,030)
38% (133,810)
40% (139,111)

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 Problem 2-10

olution Legend
ven in problem
/Calculation/Analysis required
ve analysis or Short answer required
ek or Solver cell
Ball Input
Ball Output

Year
6 7 8 9 10

3,500

$ 70,000 $70,000 $70,000 $70,000 $70,000

(46,000) (46,000) (46,000) (46,000) (46,000)
$ 24,000 $24,000 $24,000 $24,000 $24,000
(7,200) (7,200) (7,200) (7,200) (7,200)
$ 16,800 $16,800 $16,800 $16,800 $16,800
46,000 46,000 46,000 46,000 46,000
- - - - -
$ 62,800 $62,800 $62,800 $62,800 $66,300

NPV Profile

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10% 15% 20% 25% 30% 35% 40% 45%
NPV Profile
Problem 2-10

10% 15% 20% 25% 30% 35% 40% 45%

Discount Rates

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 Problem 2-11

PROBLEM 2-11

Given
Investment
Plant life
Salvage value
This is the solution to part a. of the
Variable Cost % problem. To solve for part b. simply type in
Fixed operating cost 55% in place of 45% for the variable cost
Tax rate %.
Working capital Change in revenues
Required Rate of Return

Solution
Year
0 1 2 3 4
Sales volume
Unit Price

Revenues
Variable Operating Costs
Fixed Operating Costs
Depreciation Expense
Net Operating Income
Less: Taxes
NOPAT
Plus: Depreciation
Less: CAPEX
Less: Working Capital
Free Cash Flow

NPV
IRR

a. The project appears to create value in the amount of its NPV = $419,435 and should be accepted.

b. Increasing the variable costs to 55% changes the investment outcome dramatically. The NPV is now negative at
($599,080).

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n to part a. of the
for part b. simply type in
5% for the variable cost
epted.
V is now negative at
Problem 2-11
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
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