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INPUT DATA:
Variable data:
Sales Revenue Increase $1,150,000 Cost of Borrowing
New machine price $800,000 Tax rate
Modification Cost 75,000 Operating Cost Increase (DCGS)
Receivables (Sales) 45 Salvage Value
Inventory (CGS) 24
Payables (CGS) 18

Fixed data:
MACRS class life 5
Useful life (old machine) 10

MODEL-GENERATED DATA: KEY OUTPUT:

Initial cash outlay:

Cost of new machine $ 800,000 NPV:
Modification Cost $ 75,000 IRR
Depreciable Basis $ 875,000 MIRR
Increase in Receivables $ 141,781 PI
Increase In inventory $ 60,493 PayBack
Less Increase in Payables $ 45,370 DiscPayBack
Increase in Working Capital $ 156,904

Cash outlay for new machine $ 1,031,904

===============

Depreciation schedule: $ 875,000 (Basis) Salavage Value Calculation

Salavage Value
Year MACRS Tax
Rate Dep. Book Salvage Cash Flow
--------------------- ------------------------------ ------------------------- ---------------------------
1 20% $175,000 $700,000
2 32% $280,000 $420,000
3 19% $166,250 $253,750
4 12% $105,000 $148,750
5 11% $96,250 $52,500
6 6% $52,500 $0
Annual cash flows after-tax:

Year 1 2 3 4 5
------------------------- --------------------------- -------------------------- -------------------------- ------------------------
Revenue Increase $1,150,000 $1,150,000 $1,150,000 $1,150,000 $1,150,000
Oper. Cost Increase $920,000 $920,000 $920,000 $920,000 $920,000
Depreciation 175,000 280,000 166,250 105,000 96,250
------------------------- --------------------------- -------------------------- -------------------------- ------------------------
EBIT 55,000 (50,000) 63,750 125,000 133,750
Tax 22,000 (20,000) 25,500 50,000 53,500
------------------------- --------------------------- -------------------------- -------------------------- ------------------------
A.T. Income (NOPAT) 33,000 (30,000) 38,250 75,000 80,250
Add Back Depreciation 175,000 280,000 166,250 105,000 96,250
Recovery of Working Capital
Salvage Value Cash Flow
Net cash flow $208,000 $250,000 $204,500 $180,000 $176,500
=============== ================ =============== =============== ==============

Capital Budgeting Continued

Net cash flow ($1,031,904) $208,000 $250,000 $204,500 $180,000 $176,500

=============== ================ =============== =============== ==============

Cum CF (1,031,904) (823,904) (573,904) (369,404) (189,404) (12,904)
Payback
Presnt Value (1,031,904) $185,714 $199,298 $145,559 $114,393 $100,151
Cum Disc CF (1,031,904) (846,190) (646,891) (501,332) (386,939) (286,788)
Discounted Payback
 12.00%
40.00%
$920,000
$15,000

$59,539
13.46%
12.63%
1.06
5.08
9.39

$ 15,000
$ 6,000
$ 9,000
 6 7 8 9 10
-------------------------
$1,150,000 $1,150,000 $1,150,000 $1,150,000 $1,150,000
$920,000 $920,000 $920,000 $920,000 $920,000
52,500 0.00 0.00 0.00 0.00
------------------------- -------------------------- ------------------------- ----------------------- ---------------------------
177,500 230,000 230,000 230,000 230,000
71,000 92,000 92,000 92,000 92,000
------------------------- -------------------------- ------------------------- ----------------------- ---------------------------
106,500 138,000 138,000 138,000 138,000
52,500 0 0 0 0
156,904
9,000
$159,000 $138,000 $138,000 $138,000 $303,904
=============== =============== ============== ============= ================

$159,000 $138,000 $138,000 $138,000 $303,904

=============== =============== ============== ============= ================

146,096 284,096 422,096 560,096 864,000
5.08
$80,554 $62,424 $55,736 $49,764 $97,849
(206,234) (143,810) (88,074) (38,310) 59,539
9.39
INPUT DATA:
Variable data:
Sales Revenue Increase $1,150,000 Cost of Borrowing
New machine price $650,000 Tax rate
Modification Cost 50,000 Operating Cost Increase (DCGS)
Receivables (Sales) 45 Salvage Value
Inventory (CGS) 24
Payables (CGS) 18

Fixed data:
MACRS class life 5
Useful life (old machine) 10

MODEL-GENERATED DATA:

Initial cash outlay:

Cost of new machine $ 650,000
Modification Cost $ 50,000
Depreciable Basis $ 700,000
Increase in Receivables $ 141,781
Increase In inventory $ 63,781
Less Increase in Payables $ 47,836
Increase in Working Capital $ 157,726

Cash outlay for new machine $ 857,726

===============

Depreciation schedule: $ 700,000 (Basis)

Year MACRS
Rate Dep. Book
--------------------- ------------------------------ ------------------------- ---------------------------
1 20% $140,000 $560,000
2 32% $224,000 $336,000
3 19% $133,000 $203,000
4 12% $84,000 $119,000
5 11% $77,000 $42,000
6 6% $42,000 $0

Annual cash flows after-tax:

Year 1 2 3
------------------------- --------------------------- --------------------------
Revenue Increase $1,150,000 $1,150,000 $1,150,000
Oper. Cost Increase $970,000 $970,000 $970,000
Depreciation 140,000 224,000 133,000
------------------------- --------------------------- --------------------------
EBIT 40,000 (44,000) 47,000
Tax 16,000 (17,600) 18,800
------------------------- --------------------------- --------------------------
A.T. Income (NOPAT) 24,000 (26,400) 28,200
Add Back Depreciation 140,000 224,000 133,000
Recovery of Working Capital
Salvage Value Cash Flow
Net cash flow $164,000 $197,600 $161,200
=============== ================ ===============

Capital Budgeting Continued

Net cash flow ($857,726) $164,000 $197,600 $161,200

=============== ================ ===============

Cum CF (857,726) (693,726) (496,126) (334,926)
Payback
Presnt Value (857,726) $146,429 $157,526 $114,739
Cum Disc CF (857,726) (711,297) (553,772) (439,033)
Discounted Payback
 12.00%
40.00%
g Cost Increase (DCGS) $970,000
$20,000

KEY OUTPUT:

NPV: $13,782
IRR 12.40%
MIRR 12.18%
PI 1.02
PayBack 5.44
DiscPayBack 9.85

Salavage Value Calculation

Salavage Value $ 20,000
Tax $ 8,000
Salvage Cash Flow $ 12,000

4 5 6 7 8
-------------------------- ------------------------ -------------------------
$1,150,000 $1,150,000 $1,150,000 $1,150,000 $1,150,000
$970,000 $970,000 $970,000 $970,000 $970,000
84,000 77,000 42,000 0.00 0.00
-------------------------- ------------------------ ------------------------- -------------------------- -------------------------
96,000 103,000 138,000 180,000 180,000
38,400 41,200 55,200 72,000 72,000
-------------------------- ------------------------ ------------------------- -------------------------- -------------------------
57,600 61,800 82,800 108,000 108,000
 84,000 77,000 42,000 0 0

$141,600 $138,800 $124,800 $108,000 $108,000

=============== ============== =============== =============== ==============

$141,600 $138,800 $124,800 $108,000 $108,000

=============== ============== =============== =============== ==============

(193,326) (54,526) 70,274 178,274 286,274
5.44
$89,989 $78,759 $63,228 $48,854 $43,619
(349,044) (270,285) (207,057) (158,203) (114,584)
 9 10

$1,150,000 $1,150,000
$970,000 $970,000
0.00 0.00
----------------------- ---------------------------
180,000 180,000
72,000 72,000
----------------------- ---------------------------
108,000 108,000
 0 0
157,726
12,000
$108,000 $277,726
============= ================

$108,000 $277,726

============= ================
394,274 672,000

$38,946 $89,420
(75,638) 13,782
9.85
The project is worth to be undertaken irrespective of choice between Machine A or B. This is because in both cases, the NPV is positive
Machine A is the best machine as it results in higher NPV relative to B and also it resulted in higher IRR and have lower payback than B.
Profitability Index of both machine is more than 1 but is higher in case of Machine A
es, the NPV is positive
e lower payback than B.