Land purchased six year ago for $5.

5 million
If the land is sold today, it will net $5.8 million.
Firm is planning to build a plant which will cost $13 m
Plant construction required $820,000 in grading the la
What is the initial investment?

Opportunity Cost ($5,800,000.00)

Grading cost ($820,000.00)
Cost of Plant ($13,000,000.00)
Initial Cash Flow ($19,620,000.00)
illion.
ll cost $13 million
rading the land.
Considering a new three-year expansion project.
Initial fixed asset investment of $2.79 million.
Fixed asset will be depreciated atraight line to zero ov
Project is expected to generate $2,110,000 in annual sa
with costs of $805,000. Tax rate is 35%.
What is annual Opercating Cash Flow?

Initial Cash Flow (CF0) ($2,790,000.00)

Sales $2,110,000.00
Less: Costs $805,000.00
Less: Depreciation $930,000.00
EBIT (Operating Profit) $375,000.00
Less: Taxes $131,250.00
Add: Depreciation $930,000.00
Operating Cash Flow $1,173,750.00
roject.

e to zero over three years.

in annual sales,

= ($2,790,000-$0)/3
= $2,110,000 - $805,000 - $930,000
= $375,000 x 0.35

= $375,000 - $131,250 + $930,000

Initial fixed asset investment of $2.94 million.
Fixed asset will be depreciated straight line to zero ove
Project is estimated to generate $2,160,000 in annual s
with cost of $855,000. Project requires an initial inves
of $380,000. Fixed asset will have a value of $250,00
of the project. Tax rate is 34 percent. Required rate of
What is the project's cash flow in years 0, 1, 2, and 3?
What is the project's NPV?

Initial Cash Flow (CF0) - Year 0:

Cost of Fixed Asset

Less: Increase in NWC
Year 0 Cash Flow

Operating Cash Flow (OCF1-3) - Years 1 -3

Sales
Less: Cost
Less: Depreciation
 EBIT
Less: Tax
Add: Depreciation
Operating Cash Flow
Less: DNWC
Less: Net Capital Spending
Free Cash Flow

Terminal Cash Flow - Year 3

FCF3
Plus: Salvage Value
Less: Salvage Value TAX
Plus: Recovery of NWC
Terminal or Year 3 CF

Year
0
1
 2
3

Clear Calculator:
CF CE/C 2nd CE/C
CF 3320000 +/- enter
C01 1194500 enter
F01 2 enter
C02 1739500 enter
F02 1 enter
CPT "NPV"
I/y 10 enter
CPT
answer: 60,011.27

HP Calculator: Clear "pink" and arrow key

3320000 +/- CFj

1194500 CFj
1194500 CFj
1739500 CFj
10 i
NPV
ment of $2.94 million.
ciated straight line to zero over three years.
nerate $2,160,000 in annual sales,
roject requires an initial investment in NWC
will have a value of $250,000 at the end
34 percent. Required rate of return is 10 percent.
flow in years 0, 1, 2, and 3?

- Year 0:

($2,940,000.00)
$380,000.00
($3,320,000.00)

OCF1-3) - Years 1 -3

$2,160,000.00
$855,000.00
$980,000.00 =($2,940,000-$0)/3
 $325,000.00 = $2,160,000 - $855,000 - $980,000
$110,500.00 = $325,000 x 0.34
$980,000.00
$1,194,500.00 = $325,000 - $110,500 + $980,000
$0.00
$0.00
$1,194,500.00 = $1,194,500 - $0 -$0

ear 3

$1,194,500.00 Accumulated Depreciation:

$980,000 + $980,000 + 980,000 = $2,940,000

$250,000.00 Book Value = Cost - Accum. Depr.

Book Value = $2,940,000 - $2,940,000 = $0
$85,000.00 Salvage Taxe = ($250,000 - $0) x 0.34

$380,000.00
$1,739,500.00 = $1,194,500+$250,000-$85,000+$38

Cash Flow
($3,320,000.00)
$1,194,500.00
 $1,194,500.00
$1,739,500.00

Clear Calculator:
CF CE/C 2nd CE/
CF 3320000 +/-
C01 1194500
F01 1
C02 1194500
F02 1
C03 1739500
F03 1
CPT "NPV"
I/y 10
CPT
nk" and arrow key answer: 60,011.27
0 - $980,000

+ $980,000

40,000

= $0

$85,000+$380,000
lculator:
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60,011.27