Essay About 8-Year Period And Working Capital

Financial Management
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FIN 410
Individual Project 4
1. Prepare a statement showing the incremental cash flows for this project over an 8-year period.
-Initial investment:
I = $1,000,000
-Working Capital:
WC = $200,000
ChWCi = Previous Year WC – Current WC = 0 (for i=1 to 7)
ChWC0 = -$200,000
The working capital is recovered, this means that for the end of the year 8 it will be zero or:
ChWC8 = $200,000
-Depreciation:
Di = (Invest in plant and equipment)/5 = $1,000,000/5 = $200,000
For the years 6 to 8 the depreciation will be zero.
-Revenues:
R1 = $950,000
For the years Yi (i=2 to 8):
Ri = $1,500,000
-Expenses:
Indirect incremental costs will be $80,000 all the eight years.
For each year the direct costs will be 0.55*Ri .
Then for each year Yi (i=1 to 8), the expenses (Ei) will be:
Ei = $80,000 + 0.55*Ri ,
then:
E1 = $80,000 + 0.55*$950,000 = $602,500
For i=2 to 8:
Ei = $80,000 + 0.55*$1,500,000 = $905,000
-Taxes:
The firms marginal tax rate is 35%, then the taxes will be:
For i=2 to 5
For i=6 to 8
YEARS (IN THOUSANDS)
0 1 2 3 4 5 6 7 8
1.Revenues 0 950 1500 1500 1500 1500 1500 1500 1500
2.Expenses 0 602.5 905 905 905 905 905 905 905
3.Depreciation 0 200 200 200 200 200 0 0 0
4.Income before 0 147.5 395 395 395 395 595 595 595
tax, [1-(2+3)]
5.Taxes 0 51.6 138.2 138.2 138.2 138.2 238.2 238.2 238.2
6.Net Income 0 95.9 256.8 256.8 256.8 256.8 356.8 356.8 356.8
[4-5]
7.Cash flow
from operation 0 295.9 456.8 456.8 456.8 456.8 356.8 356.8 356.8
[1-2-5]
8.Investments -1000 0 0 0 0 0 0 0 0
9.Change in WC -200 0 0 0 0 0 0 0 200
10.Total cash -1200 0 0 0 0 0 0 0 200
flow from investment
11.Total cash -1200 295.9 456.8 456.8 456.8 456.8 356.8 356.8 556.8
flow
2. Calculate the Payback Period and the NPV for the project.
-Payback Period:
PB = Y + U/CFi
We will consider the total initial investment (TI) as the sum of the
invest in plant and equipment plus the initial Working Capital
required.
TI = $1,200,000
At the