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					Chapter 10

Problem 5 (chapter 9)      Find NPV, IRR, Payback and Profitability Index using 7 year MACRS depreciation.


           Net Invest              1          2           3          4            5        6           7

rev(sav)                      15000      15000        15000      15000      15000       15000     15000
less exp                          0          0            0          0          0           0         0
less dep                      14290      24490        17490      12490       8930        8920      8930
EBT                             710      -9490        -2490       2510       6070        6080      6070
less tax                        284      -3796         -996       1004       2428        2432      2428
EAT                             426      -5694        -1494       1506       3642        3648      3642
plus dep                      14290      24490        17490      12490       8930        8920      8930
NCF             -100000       14716      18796        15996      13996      12572       12568     12572

PV(ncf)         $90,181     $13,378    $15,534    $12,018       $9,559    $7,806      $7,094    $6,451

Using the calculator, find the PV of the cash flows by entering the NCF as FV, 10%=i, n=year, and then compute for PV.

Depreciation Schedule
deprec                         14290      24490        17490     12490       8930       8920       8930
year                               1          2            3         4          5          6          7
percent                       0.1429     0.2449       0.1749    0.1249     0.0893     0.0892     0.0893
basis           100000

NPV             ($9,819)
IRR               7.66%

Net Present Value
          PV(c.f.)          $90,181
minus     Net Invest         -100000
equals    NPV               ($9,819)


To find IRR using the trial and error method, find % that makes NPV equal to 0.

year                               1          2          3            4         5           6         7
pv              $98,469     $13,626    $16,115    $12,698      $10,287    $8,556      $7,920    $7,336

for example change 10% to 8% in row 37 and notice the NPV ($1531) is closer to zero..

Net Present Value
          PV(c.f.)          $98,469
minus     Net Invest         -100000
equals    NPV               ($1,531)

Change it to 7% and see what happens.


Profitability Index = PV(cash flows) / Net Invest =            $0.90
Payback: accumulate the NCF until you get the net investment back.

                          year         NCF      cum
                                   1      14716     14716
                                   2      18796     33512
                                   3      15996     49508
                                   4      13996     63504
                                   5      12572     76076
                                   6      12568     88644
                                   7      12572   101216
                                   8      10784   112000
                                   9       9000   121000
                                  10       9000   130000
                                  11       9000   139000
                                  12       9000   148000

Payback is between 6 and 7 years. Interpolate to find the exact number of years to nearest tenth.

                  11356 is needed to reach 100000 after year six, this is 11356/12572 or       0.903277
                        therefore the payback is                 6.9 years
ACRS depreciation.


                     8           9        10        11        12

                15000        15000     15000     15000     15000
                    0            0         0         0         0
                 4460            0         0         0         0
                10540        15000     15000     15000     15000
                 4216         6000      6000      6000      6000
                 6324         9000      9000      9000      9000
                 4460            0         0         0         0
                10784         9000      9000      9000      9000

               $5,031       $3,817    $3,470    $3,154    $2,868

 and then compute for PV.


                  4460           0         0         0         0
                     8           9        10        11        12
                0.0446           0         0         0         0




                     8            9        10        11        12
               $5,826       $4,502    $4,169    $3,860    $3,574
years

				
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