Complete the cash flow projections and find the NPV for this project. Initial CAPX are $20,000 and depreciated on a 10-year MACRS schedule (the percentages of initial cost allowed for depreciation under the current U.S. tax system). Net working capital required is $5,000 (just a one- time increase) over the life of the project. Incremental sales are $22,000 per year and incremental operating expenses are $18,000 per year. Assume that plant and equipment is disposed of at the end of year 7 (it has no resale value). The tax rate is 30%. Assume a WACC of 9.3%. Note that the spreadsheet is set up so that assumptions (things you can change later) go in the green cells, and that the other cells contain formulas based on the assumptions. 1. Assumptions. Fill in the assumptions section first. Put in the tax rate across the whole row. Put in the MACRS percentages. (The quickest way to do this is to copy them from the MACRS schedule, then go to where you want to paste the values, select Paste Special, click on Values and Transpose, and hit OK.) Enter the WACC and the resale value. 2. Balance sheet items. I find the cash flow projections are easier if we track two balance sheet items, Net Working Capital and Net PPE. In the NWC line, enter the amount that will be required for the project in each year. Note that the NWC must be in place by (the end of) Year 0, and would be gone by (the end of) year 7. Keep in mind that this line is the level of NWC in each year, not the change in NWC. In the Net PPE line, we are going to track the book value of the assets we acquire for this project. So in the green cell (Year 0) put the amount of the initial CAPX. In subsequent years the Net PPE will be Net PPE from the previous year minus depreciation from that year. (Go ahead and enter this formula even though depreciation isnt entered yet.) 3. Getting EBIT(1t). Enter sales and expense for Years 1-7. Enter depreciation expense for each year, which is the initial value of PPE times the MACRS percentage for that year. Enter the formula for EBIT, which is sales less operating expenses and depreciation. Enter taxes, which is the tax rate times EBIT, and then enter the formula for EBIT(1t). Higgins, Analysis for Financial Management 1 4. CAPX. In year 0, CAPX is just equal to the initial value of our PPE, so just enter a formula that references that cell. The other thing we want to account for here is selling PPE at the end of the project. Put this in the next line below CAPX. In Year 7 we get a cash inflow from selling the equipment for resale value (RV), and the we also pay taxes on the gain over book value (BV). Here the RV is given in the assumptions, and the BV is the value of Net PPE in Year 7. So enter a formula in Year 7 under CAPX that reflects: RV (RVBV)*t where t is the tax rate. 5. Change in NWC. For the change in NWC (?NWC), for Year 0, we just make it equal to the initial amount of NWC in Year 0 from above. For Years 1-7, the change in NWC is just that years NWC minus the previous years NWC. 6. Cash Flows. Now were ready to calculate cash flow each year, and all we do is apply the formula: EBIT(1t)+Dep. CAPX?NWC. Enter this formula and copy it across for all years 0-7. Then the only change necessary is to also add in the sale of PPE in year 7 to the year 7 cash flows. 7. NPV. Now enter the formula for NPV on the last line. Remember that the NPV function in Excel discounts the first value by one year, so dont put the initial cash flow inside the NPV function. Add this in separately. Q1: What is the NPV of the project under the given assumptions? ____________ Q2: How low would the initial investment have to be in order to make this project acceptable? ____________
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