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Winston & Holmes

Step 1

Initial Capital
Investment

$ (1,300,000.00)

Step 2

Initial Working
Capital Investment
Step 3
Cost of Capital
Tax Rate

$ (1,200,000.00)
After Tax Operating Income
15%
25%
$ 1,331,319.50

Year
Sales
% change in sales
Sales growth(Inflation adjusted)
Advertising

2,958,487.78

1,242,564.87
0.30
0.42
185,502.00

1,400,930.98
0.11
0.13
166,951.80

Employees Salaries

55,680.00

55,680.00

Rent

66,995.52

66,995.52

50,000.00
52,500.00
831,887.35
623,915.51

52,500.00
1,058,803.66
794,102.74

0.870
542535.2267

0.756
600455.7608

Party
Utlity Exp
S-C
(S-C)(1-T)
PVIF (Present value interest factor)
PV of each item
PV of Operating Income

2,958,487.78
2,218,865.84

4,175,324.51

Step 4

Year
NWC Requirement
Change in NWC

$1,200,000.00

$1,704,000.00
$1,921,176.47
-$504,000.00
-$217,176.47
(Negative Sign signifies that there is a cash outflow. If NWC increases the

PV of each item
PV of NWC change

Step 5
Year

-$438,260.87

-$164,216.61

(652,711.77)

Salvage
PV of Salvage

Step 6
Year

6,179.62

Working Capital Released


PV of W.C. Released

616,426.08

Step 7

CCA Tax Shield Calculation


CCA Rate
Tax Rate

20%
25%

PV of CCA Tax Shield

PV of Lost Tax Shield


(dues to Salvage Value)

Step 8

= {(C*d*T}/(d + k )}{(1+0.5k)/(1+k)}
Where, C is the initial capital investment

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


Where, Sn is the salavage value at the end of the proj

Finding out the Net Present Value


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

Decision

173,602.48

$1,817,938.11

1.727

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 Rate
Tax Rate

CCA calculation

Year
1
2
3
4
5
6
7
8
9
10

$
$
$
$
$
$
$
$
$
$

Beginning
UCC
1,200,000.00
1,080,000.00
864,000.00
691,200.00
552,960.00
442,368.00
353,894.40
283,115.52
226,492.42
181,193.93

CCA
$
$
$
$
$
$
$
$
$
$

120,000.00 $
216,000.00 $
172,800.00 $
138,240.00 $
110,592.00 $
88,473.60 $
70,778.88 $
56,623.10 $
45,298.48 $
36,238.79 $

Ending
UCC
1,080,000.00
864,000.00
691,200.00
552,960.00
442,368.00
353,894.40
283,115.52
226,492.42
181,193.93
144,955.15

Step 4

Year
NWC Requirement
Change in NWC

Step 5

1200000

1704000
1921176.471
-504000
-217176.4706
(Negative Sign signifies that there is a cash outflow. If NWC increases the
Project Operating Cash Flow Calculation

Cost of Capital

15%

Year
Sales
V Cost
F Cost
S-C
D (= CCA)

1242564.868
185502
0
1057062.868
120000

1400930.978
166951.8
0
1233979.178
216000

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

937062.8676
702797.1507

1017979.178
763484.3836

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

822797.1507

979484.3836

-504000
822797.1507

-217176.4706
979484.3836

Step 6
Year

Project total cash flow

Initial Investment
Initial net working capital
Change in NWC
Operating Cash Flow {(S-C-D)(1-T)+D}
Working capital release

0
-1300000
-1200000

Salvage value
Cash Flow

-2500000

318797.1507

762307.913

PVIF
Discounted Cash Flow

1
-2500000

0.869565217
277214.9137

0.756143667
576414.301

1979919.191

PV of Cash Flow
Step 7

Adjustment for Lost Tax Shield (due to salvage)


Salvage Value =

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


Step 8

10577.25

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


NPV =

Decision

32356.05943

1990496.44

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
$ 2,958,487.78
$ 1,242,564.87

Rent
66995.52

1,579,481.00
0.11
0.13
150,256.62

1,548,510.79
-0.02
-0.02
135,230.96

1,518,147.83
-0.02
-0.02
121,707.86

1,488,380.23
-0.02
-0.02
121,707.86

1,459,196.30
-0.02
-0.02
121,707.86

1,430,584.61
-0.02
-0.02
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
1,254,048.86
940,536.65

52,500.00
1,238,104.31
928,578.23

52,500.00
1,221,264.45
915,948.34

52,500.00
1,191,496.85
893,622.63

52,500.00
1,162,312.92
871,734.69

52,500.00
1,133,701.23
850,275.92

0.658
0.572
618418.1137 530917.6187

0.497
455388.2042

0.432
386337.7251

0.376
327717.3588

0.327
277956.7067

$2,166,032.30 $2,123,561.07 $2,081,922.62


-$244,855.82
$42,471.22
$41,638.45
tflow. If NWC increases there will be Cash Outflow)

$2,041,100.61
$40,822.01

$2,001,079.03 $1,961,842.18
$40,021.58
$39,236.84

-$160,996.68

$24,283.06

$20,701.67

$17,648.48

$15,045.59

$12,826.59

tal investment

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

value at the end of the project's life

20%
25%

2166032.295 2123561.074 2081922.621


-244855.8247 42471.22148 41638.45243
tflow. If NWC increases there will be Cash Outflow)

2041100.609
40822.01218

2001079.029
40021.58057

1961842.185
39236.8437

1579481.005 1548510.789
150256.62
135230.958
0
0
1429224.385 1413279.831
172800
138240

1518147.832
121707.8622
0
1396439.97
110592

1488380.228
121707.8622
0
1366672.366
88473.6

1459196.302
121707.8622
0
1337488.44
70778.88

1430584.61
121707.8622
0
1308876.747
56623.104

1256424.385 1275039.831
942318.2886 956279.8733

1285847.97
964385.9776

1278198.766
958649.0742

1266709.56
950032.1697

1252253.643
939190.2325

1115118.289 1094519.873

1074977.978

1047122.674

1020811.05

995813.3365

-244855.8247
1115118.289

42471.22148
1094519.873

41638.45243
1074977.978

40822.01218
1047122.674

40021.58057
1020811.05

39236.8437
995813.3365
1961842.185

0
870262.4639

1136991.095

1116616.43

1087944.686

1060832.63

2996892.365

0.657516232
572211.6965

0.571753246
650078.3486

0.497176735
555155.7113

0.432327596
470348.5108

0.37593704
398806.2789

0.326901774
979689.4302

(At the end of Project life)

end of Project Life

shield adjustment

s more time consuming.

Data
Starting Year
Current Sales - 1996
Yorkvilles sales
1st sales increas
2-4 yrs sales increase
Full-time wage$/hr
additional Full Time
Part-time wage$/hr
Additional part time employees
Yorkville increas sq. footage
Yorkville hours of ops/week
weeks/yr
store close for _____ days
9

10

1,402,533.93
-0.02
-0.02
121,707.86

1,375,033.27
-0.02
-0.02
121,707.86

1996
5100841
58%
45%
15%
12
2
10
1
1875
87
52
5

Inventory Turonver =COGS/Inventory


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

55,680.00

55,680.00

66,995.52

66,995.52

52,500.00
1,105,650.55
829,237.91

52,500.00
1,078,149.88
808,612.41

0.284
235721.1689

0.247
199876.6216

10

$1,923,374.69 $1,885,661.46
$38,467.49
$37,713.23

$10,934.86

$9,322.13

10

$25,000.00

10

$1,885,661.46

Investmesnts
Contingency
Furnitute
Ttl Investments
F&F useful life
St. line depreciation/yr
Salvage Value

Working Capital
Gross Margin
Inventory Days of COGS
Decrease in days
New inventory days

$ 100,000.00
$ 1,200,000.00
$ 1,300,000.00
$
10.00
$ 117,500.00
$
25,000.00

46.50%
118
20
98

Costs
Electricity (per sq. ft) per month
Gas (per sq. ft) per month
Water (per sq. ft.) per month
Rent increase (on overall rent)
Current Rent
Annual maintenance (option 1)
Annual maintenance (option 2)
Annual maintenance is tax deductible
Advertising expense (current)
Advertising 1st year increase
Adv. Decrease in subsequent yrs
Gran Opening
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
ft
pt
weekdays
weekends
hrs/week
hrs/year
cost

other (x2)
12
10
13 hrs
11 hrs
87
4524
$ 597,168.00

2 fulltime
hrs yearly
cost

80hrs/week
3840
108576

1 part time
hrs yearly
cost

20hrs/week
960
45240

total cost

153816

4
2

8
weekdays

11 hrs
132
6864
$ 1,208,064.00

ttl cost

$ 1,805,232.00