Managerial Economics (chapter 14)

Estimated cash flow from project year Sales less : variable costs fixed costs Depreciation Profits before taxes Less: income tax Profit after tax plus: Depreciation Net cash flow

1 $1,000,000 500,000 150,000 200,000 $150,000 60,000 $90,000 200,000 $290,000

2 3 4 $1,100,000 $1,210,000 $1,331,000 550,000 605,000 665,500 150,000 150,000 150,000 200,000 200,000 200,000 $200,000 $255,000 $315,500 80,000 102,000 126,200 120,000 153,000 189,300 200,000 200,000 200,000 $320,000 $353,000 $389,300 Plus: salvage value of equipment Recovery ofworking capital Net cash flow in year 5

5 $1,464,100 732,050 150,000 200,000 382,050 152,820 229,230 200,000 $429,230 250,000 100,000 $779,230

project

year (t)

cash flow (2) 0 1 2 3 4 5

present value interest factor at 15 percent (3) ($2,500,000) 600,000 800,000 800,000 600,000 250,000

1 0.87 0.76 0.66 0.57 0.5

8%

Present value (4)= (2) x (3) ($2,500,000) $521,742 $604,912 $526,016 $343,050 $124,295 ($379,985)