Carlton Pump Company

Submitted by: 19010025

New Pumping System

Selling Price $ 145,000.00
Installation Cost $ 5,000.00
IRS stated life 5 years
Actual service life 15 years
Salvage value $ -
Yearly Saving $ 35,000.00
Annual Depreciation $ 10,000.00

Old Pumping System

Years in use 12
Service Life 15 years
Current Book Value $ 6,000.00
Annual Depreciation $ 2,000.00
Salvage Value $ 20,000.00
Cost of removal $ 1,000.00

WACC 15%
Tax Rate 40%

Outcome
NPV $ 8,157.67 =NPV(B21,M29:AA29) + L29
IRR 16.22% =IRR(L29:AA29)
Payback Period 5.54 =PERCENTRANK(L30:AA30,0)*15
Discounted Payback Period 12.62 =PERCENTRANK(L32:AA32,0)*15

With Accelerated Depreciation, the cash flows will With higher tax rate (such as 50%) the NPV and
be higher and the NPV and IRR would be higher IRR will be lower as cash flows will decrease
With Accelerated Depreciation, the cash flows will With higher tax rate (such as 50%) the NPV and
be higher and the NPV and IRR would be higher IRR will be lower as cash flows will decrease
New Pumping System
Time (15 years) (Years 8 to 15 on next page)
0 1 2 3 4 5 6 7
Price + Installation $ (150,000.00)
Cash from Sale $ 19,000.00
Gain $ 13,000.00
Tax on gain $ (5,200.00)
Net Cash from Sale $ 13,800.00
Savings $ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00
Depreciation $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00)
Operating profit $ (136,200.00) $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00
Tax $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00)
EBIAT $ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00
Depreciation Added $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
Cash Flow $ (136,200.00) $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00

Old Pumping System

0 1 2 3 4 5 6 7
Depreciation $ (2,000.00) $ (2,000.00) $ (2,000.00)
Operating profit $ (2,000.00) $ (2,000.00) $ (2,000.00)
Tax $ 800.00 $ 800.00 $ 800.00
EBIAT $ (1,200.00) $ (1,200.00) $ (1,200.00)
Depreciation Added $ 2,000.00 $ 2,000.00 $ 2,000.00
Cash Flow $ 800.00 $ 800.00 $ 800.00

Incremental Cash Flows

0 1 2 3 4 5 6 7
Difference $ (136,200.00) $ 24,200.00 $ 24,200.00 $ 24,200.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00
Cumulated Difference $ (136,200.00) $ (112,000.00) $ (87,800.00) $ (63,600.00) $ (38,600.00) $ (13,600.00) $ 11,400.00 $ 36,400.00
Discounted Difference $ (136,200.00) $ 21,043.48 $ 18,298.68 $ 15,911.89 $ 14,293.83 $ 12,429.42 $ 10,808.19 $ 9,398.43
Cumulated Disc Diff $ (136,200.00) $ (115,156.52) $ (96,857.84) $ (80,945.95) $ (66,652.12) $ (54,222.70) $ (43,414.51) $ (34,016.09)
 8 9 10 11 12 13 14 15

$ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00 $ 35,000.00

$ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00)
$ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00
$ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00) $ (10,000.00)
$ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00 $ 15,000.00
$ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
$ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00

8 9 10 11 12 13 14 15

8 9 10 11 12 13 14 15
$ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00 $ 25,000.00
$ 61,400.00 $ 86,400.00 $ 111,400.00 $ 136,400.00 $ 161,400.00 $ 186,400.00 $ 211,400.00 $ 236,400.00
$ 8,172.54 $ 7,106.56 $ 6,179.62 $ 5,373.58 $ 4,672.68 $ 4,063.20 $ 3,533.22 $ 3,072.36
$ (25,843.54) $ (18,736.98) $ (12,557.36) $ (7,183.78) $ (2,511.11) $ 1,552.09 $ 5,085.31 $ 8,157.67