npv calculation

Winston & Holmes

Step 1

Initial Capital

Investment (1,300,000.00)$

Step 2

Initial Working

Capital Investment (1,200,000.00)$

Step 3 After Tax Operating Income

Cost of Capital 15%

Tax Rate 25%

1,331,319.50$

Year 0 1 2

Sales 2,958,487.78 1,242,564.87 1,400,930.98

% change in sales 0.30 0.11

Sales growth(Inflation adjusted) 0.42 0.13

Advertising 185,502.00 166,951.80

Employees Salaries 55,680.00 55,680.00

Rent 66,995.52 66,995.52

Party 50,000.00

Utlity Exp 52,500.00 52,500.00

S - C 2,958,487.78 831,887.35 1,058,803.66

(S-C)(1-T) 2,218,865.84 623,915.51 794,102.74

PVIF (Present value interest factor) 0.870 0.756

PV of each item 542535.2267 600455.7608

PV of Operating Income 4,175,324.51$

Step 4

Year 0 1 2

NWC Requirement $1,200,000.00 $1,704,000.00 $1,921,176.47

Change in NWC -$504,000.00 -$217,176.47

(Negative Sign signifies that there is a cash outflow. If NWC increases there will be Cash Outflow)

PV of each item -$438,260.87 -$164,216.61

PV of NWC change (652,711.77)$

Step 5

Year 0 1 2

Salvage

PV of Salvage 6,179.62$

Step 6

Year 0 1 2

Working Capital Released

PV of W.C. Released 616,426.08$

Step 7

CCA Tax Shield Calculation

CCA Rate 20%

Tax Rate 25%

PV of CCA Tax Shield 173,602.48$ = {(C*d*T}/(d + k )}{(1+0.5k)/(1+k)}

Where, C is the initial capital investment

PV of Lost Tax Shield (882.80)$ = - {(So*d*T}/(d + k )} OR = - {(Sn*d*T}/(d + k )}{1/(1+k)^n}

(dues to Salvage Value) Where, Sn is the salavage value at the end of the project's life

Step 8 Finding out the Net Present Value

You need to add up all the values found in step 1 - 7.

NPV = $1,817,938.11 1.727

Decision Project's NPV is Positive --> Accept the Project

Note: This approach is easier and time saving. But we don't know the project cash flow each year.

Alternative Approach: Capital Budgeting: Practice Problem 1

Step 1

Initial Capital

Investment -1300000

Step 2

Initial Working

Capital Investment -1200000

Step 3 CCA calculation CCA Rate

Tax Rate

Year Beginning CCA Ending

UCC UCC

1 1,200,000.00$ 120,000.00$ 1,080,000.00$

2 1,080,000.00$ 216,000.00$ 864,000.00$

3 864,000.00$ 172,800.00$ 691,200.00$

4 691,200.00$ 138,240.00$ 552,960.00$

5 552,960.00$ 110,592.00$ 442,368.00$

6 442,368.00$ 88,473.60$ 353,894.40$

7 353,894.40$ 70,778.88$ 283,115.52$

8 283,115.52$ 56,623.10$ 226,492.42$

9 226,492.42$ 45,298.48$ 181,193.93$

10 181,193.93$ 36,238.79$ 144,955.15$

Step 4

Year 0 1 2

NWC Requirement 1200000 1704000 1921176.471

Change in NWC -504000 -217176.4706


Step 5 Project Operating Cash Flow Calculation

Cost of Capital 15%

Year 0 1 2

Sales 1242564.868 1400930.978

V Cost 185502 166951.8

F Cost 0 0

S - C 1057062.868 1233979.178

D (= CCA) 120000 216000

S - C - D 937062.8676 1017979.178

(S-C-D)*(1-T) 702797.1507 763484.3836

(S-C-D)*(1-T) + D 822797.1507 979484.3836

Step 6 Project total cash flow

Year 0 1 2

Initial Investment -1300000

Initial net working capital -1200000

Change in NWC -504000 -217176.4706

Operating Cash Flow {(S-C-D)(1-T)+D} 822797.1507 979484.3836

Working capital release

Salvage value

Cash Flow -2500000 318797.1507 762307.913

PVIF 1 0.869565217 0.756143667

Discounted Cash Flow -2500000 277214.9137 576414.301

PV of Cash Flow 1979919.191

Step 7 Adjustment for Lost Tax Shield (due to salvage)

Salvage Value = 0

{(UCC - Sn)*d*T}/(d + k ) = 32356.05943

Where, UCC is the Undepreciated capital Cost at the end of Project Life

Sn is the salvage Value at th end of the project life

d is the CCA rate

T is the tax rate

k is the cost of capital

PV of lost tax shield adjustment: 10577.25

Step 8 Calculating NPV = PV of Project Cash Flow + PV of lost tax shield adjustment

NPV = 1990496.44

Decision Project's NPV is Positive --> Accept the Project

Note: This approach is more intuitive and we see the project cash flow each year. But it is more time consuming.

Sales Rent

2,958,487.78$ 66995.52

1,242,564.87$

3 4 5 6 7 8

1,579,481.00 1,548,510.79 1,518,147.83 1,488,380.23 1,459,196.30 1,430,584.61

0.11 -0.02 -0.02 -0.02 -0.02 -0.02

0.13 -0.02 -0.02 -0.02 -0.02 -0.02

150,256.62 135,230.96 121,707.86 121,707.86 121,707.86 121,707.86

55,680.00 55,680.00 55,680.00 55,680.00 55,680.00 55,680.00

66,995.52 66,995.52 66,995.52 66,995.52 66,995.52 66,995.52

52,500.00 52,500.00 52,500.00 52,500.00 52,500.00 52,500.00

1,254,048.86 1,238,104.31 1,221,264.45 1,191,496.85 1,162,312.92 1,133,701.23

940,536.65 928,578.23 915,948.34 893,622.63 871,734.69 850,275.92

0.658 0.572 0.497 0.432 0.376 0.327

618418.1137 530917.6187 455388.2042 386337.7251 327717.3588 277956.7067

3 4 5 6 7 8

$2,166,032.30 $2,123,561.07 $2,081,922.62 $2,041,100.61 $2,001,079.03 $1,961,842.18

-$244,855.82 $42,471.22 $41,638.45 $40,822.01 $40,021.58 $39,236.84


-$160,996.68 $24,283.06 $20,701.67 $17,648.48 $15,045.59 $12,826.59

3 4 5 6 7 8

3 4 5 6 7 8

Where, C is the initial capital investment

= - {(So*d*T}/(d + k )} OR = - {(Sn*d*T}/(d + k )}{1/(1+k)^n}

Where, Sn is the salavage value at the end of the project's life

20%

25%

3 4 5 6 7 8

2166032.295 2123561.074 2081922.621 2041100.609 2001079.029 1961842.185

-244855.8247 42471.22148 41638.45243 40822.01218 40021.58057 39236.8437


3 4 5 6 7 8

1579481.005 1548510.789 1518147.832 1488380.228 1459196.302 1430584.61

150256.62 135230.958 121707.8622 121707.8622 121707.8622 121707.8622

0 0 0 0 0 0

1429224.385 1413279.831 1396439.97 1366672.366 1337488.44 1308876.747

172800 138240 110592 88473.6 70778.88 56623.104

1256424.385 1275039.831 1285847.97 1278198.766 1266709.56 1252253.643

942318.2886 956279.8733 964385.9776 958649.0742 950032.1697 939190.2325

1115118.289 1094519.873 1074977.978 1047122.674 1020811.05 995813.3365

3 4 5 6 7 8

-244855.8247 42471.22148 41638.45243 40822.01218 40021.58057 39236.8437

1115118.289 1094519.873 1074977.978 1047122.674 1020811.05 995813.3365

1961842.185

0

870262.4639 1136991.095 1116616.43 1087944.686 1060832.63 2996892.365

0.657516232 0.571753246 0.497176735 0.432327596 0.37593704 0.326901774

572211.6965 650078.3486 555155.7113 470348.5108 398806.2789 979689.4302

(At the end of Project life)

UCC is the Undepreciated capital Cost at the end of Project Life

Calculating NPV = PV of Project Cash Flow + PV of lost tax shield adjustment

Note: This approach is more intuitive and we see the project cash flow each year. But it is more time consuming.

Data

Starting Year 1996

Current Sales - 1996 5100841

Yorkvilles sales 58%

1st sales increas 45%

2-4 yrs sales increase 15%

Full-time wage$/hr 12

additional Full Time 2

Part-time wage$/hr 10

Additional part time employees 1

Yorkville increas sq. footage 1875

Yorkville hours of ops/week 87

weeks/yr 52

store close for _____ days 5

9 10

1,402,533.93 1,375,033.27 Inventory Turonver =COGS/Inventory

-0.02 -0.02

-0.02 -0.02 Days sales in inventory 365 days/Inventory Turnover

121,707.86 121,707.86

Inventory = COGS/(365/Days sales in inventory)

55,680.00 55,680.00

66,995.52 66,995.52

52,500.00 52,500.00

1,105,650.55 1,078,149.88

829,237.91 808,612.41

0.284 0.247

235721.1689 199876.6216

9 10

$1,923,374.69 $1,885,661.46

$38,467.49 $37,713.23

$10,934.86 $9,322.13

9 10

$25,000.00

9 10

$1,885,661.46

Investmesnts Costs

Contingency 100,000.00$ Electricity (per sq. ft) per month

Furnitute 1,200,000.00$ Gas (per sq. ft) per month

Ttl Investments 1,300,000.00$ Water (per sq. ft.) per month

F&F useful life 10.00$ Rent increase (on overall rent)

St. line depreciation/yr 117,500.00$ Current Rent

Salvage Value 25,000.00$ Annual maintenance (option 1)

Annual maintenance (option 2)

Annual maintenance is tax deductible

Working Capital Advertising expense (current)

Gross Margin 46.50% Advertising 1st year increase

Inventory Days of COGS 118 Adv. Decrease in subsequent yrs

Decrease in days 20 Gran Opening

New inventory days 98

Inflation

CCA: Furniture & Fixture

Discount Rate

Tax rate

1

0.25

0.5

38%

176304

117500

= CCA

185502

100%

10% up to year 6

$50,000.00

2%

20%

25%

yorkville other (x2)

ft 12 4 8

pt 10 2

weekdays 13 hrs weekdays 11 hrs

weekends 11 hrs

hrs/week 87 132

hrs/year 4524 6864

cost 597,168.00$ 1,208,064.00$ ttl cost

2 fulltime 80hrs/week

hrs yearly 3840

cost 108576

1 part time 20hrs/week

hrs yearly 960

cost 45240

total cost 153816

1,805,232.00$

npv calculation

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