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DECLINING DEPRECIATION (20%)

Year Initial Cost Income Annual Depr. (calcs) Book Value


0.2 *Book Value Book Value-Dep
0 10000
1 2000 2000 0.2*10000 8000
2 2000 1600 0.2*8000 6400
3 2000 1280 0.2*6400 5120
4 2000 1024 0.2*5120 4096
5 2000 819.2 0.2*4096 3276.8

STRAIGHT LINE DEPRECIATION

Year Initial Cost Income Annual Depr. (calcs) Book Value


(Initial Cost-Residual Value)/years Book Value-Dep
0 10000 1400
1 2000 1400 (10000-3000)/5 8600
2 2000 1400 (10000-3000)/5 7200
3 2000 1400 (10000-3000)/5 5800
4 2000 1400 (10000-3000)/5 4400
5 2000 1400 (10000-3000)/5 3000
(calcs) Taxable Income (calcs) Income Tax (calcs)
Book Value-Dep Income-Dep. Taxable Income * tax rate (=40%)

10000-2000 0 2000-2000 0 0*0.4


8000-1600 400 2000-1600 160 400*0.4
6400-1280 720 2000-1280 288 720*0.4
5120-1024 976 2000-1024 390.4 976*0.4
4096-819.2 1180.8 2000-819.2 472.32 1180.8*0.4

(calcs) Taxable Income (calcs) Income Tax (calcs)


Book Value-Dep Income-Dep. Taxable Income * tax rate (=40%)

10000-1400 600 2000-1400 240 600*0.4


8600-1400 600 2000-1400 240 600*0.4
7200-1400 600 2000-1400 240 600*0.4
5800-1400 600 2000-1400 240 600*0.4
4400-1400 600 2000-1400 240 600*0.4
ALTERNATIVE 1

Revenue $15,000 pa
Depreciation 10000 year 1
-2000 for every year

Year Initial Cost Income Annual Depr.


Depr-2000
0 30000
1 15000 10000
2 15000 8000
3 15000 6000
4 15000 4000
5 15000 2000
30000

ALTERNATIVE 2

Revenue $15,000 pa
Depreciation Straight Line Dep.
Final BV 0

Year Initial Cost Income Annual Depr.


IC/5
0 30000
1 15000 6000
2 15000 6000
3 15000 6000
4 15000 6000
5 15000 6000
30000

ALTERNATIVE 3

Revenue $18,000 pa
Depreciation Straight Line Dep.
Final BV 0

Year Initial Cost Income Annual Depr.


(IC-salvage)/5
0 50000
1 18000 5000
2 18000 5000
3 18000 5000
4 18000 5000
5 43000 5000
25000

To calculate tax deductable interest:


Year Annuity Payment Ammount Borrowed Interest
A=P(1+i)^n*(i/((1+i)^n-1)) Remaining Loan *0.1
0 20000 0
1 5275.9496158949 2000
2 5275.9496158949 1672.4050384105
3 5275.9496158949 1312.0505806621
4 5275.9496158949 915.66067713879
5 5275.9496158949 479.63178326318

Thus, go with option 2!!


(Declining Depreciation)

(calcs) Book Value (calcs) Taxable Income (calcs)


Depr-2000 Book Value-Dep Income-Dep.

given 20000 30000-10000 5000 15000-10000


10000-2000 12000 20000-8000 7000 15000-8000
8000-2000 6000 12000-6000 9000 15000-6000
6000-2000 2000 6000-4000 11000 15000-4000
4000-2000 0 2000-2000 13000 15000-2000

(calcs) Book Value (calcs) Taxable Income (calcs)


IC/5 Book Value-Dep Income-Dep.

30000/5 24000 30000-6000 9000 15000-6000


30000/5 18000 24000-6000 9000 15000-6000
30000/5 12000 18000-6000 9000 15000-6000
30000/5 6000 12000-6000 9000 15000-6000
30000/5 0 6000-6000 9000 15000-6000

Salvage value 25000


Borrows 20000 capital which is Annuity

(calcs) Book Value (calcs) Interest Paid Taxable Income


(IC-salvage)/5 Book Value-Dep Income-Dep-Interest Paid+Salvage

(50000-25000)/5 45000 50000-5000 2000 11000


(50000-25000)/5 40000 45000-5000 1672.4050384105 11327.59496159
(50000-25000)/5 35000 40000-5000 1312.0505806621 11687.949419338
(50000-25000)/5 30000 35000-5000 915.66067713879 12084.339322861
(50000-25000)/5 25000 30000-5000 479.63178326318 37520.368216737

Remaining Loan
Remaining Loan *0.1 Remaining loan-Annuity+interest
20000
20000*0.1 16724.050384105 20000-5276+2000
16724*0.1 13120.505806621 16724-5276+1672.4
13121*0.1 9156.6067713879 13120.5-5276+1312
9157*0.1 4796.3178326318 9157-5276+916
4796*0.1 0.00 4796-5276+480
Income Tax (calcs) Profit (calcs)
Taxable Income * tax rate (=40%) Profit=Income-Income Tax

2000 5000*0.4 13000 15000-2000


2800 7000*0.4 12200 15000-2800
3600 9000*0.4 11400 15000-3600
4400 11000*0.4 10600 15000-4400
5200 13000*0.4 9800 15000-5200
57000

Income Tax (calcs) Profit (calcs)


Taxable Income * tax rate (=40%) Profit=Income-Income Tax

3600 9000*0.4 11400 15000-3600


3600 9000*0.4 11400 15000-3600
3600 9000*0.4 11400 15000-3600
3600 9000*0.4 11400 15000-3600
3600 9000*0.4 11400 15000-3600
57000

5275.9496158949 A=P(1+i)^n*(i/((1+i)^n-1))

(calcs) Income Tax (calcs) Profit (calcs)


ome-Dep-Interest Paid+Salvage Taxable Income * tax rate (=40%) Profit=Income-Income Tax-Annuity

18000-5000-2000 4400 4400*0.4 8324.0503841051 18000-4400-5276


18000-5000-1672 4531.0379846358 4531*0.4 8193.0123994693 18000-4531-5276
18000-5000-1312 4675.1797677352 4675*0.4 8048.8706163699 18000-4675-5276
18000-5000-916 4833.7357291445 4834*0.4 7890.3146549606 18000-4834-5276
(18000+25000)-5000-480 15008.147286695 15008*0.4 22715.90309741 18000+25000-15008-5276
55172.151152315
25000-15008-5276
Fixed Capital 500 thousands
Working capital 100 thousands
Life 10 years
Salvage value 0
Depreciation Straight line
Tax rate 40%
Discount rate 5%

Year Capital Movement (calcs) Revenue Product Cost(expenditure)


Capital+WC (given) (given)
0 -100 -100
1 -450 -450 400 300
2 -50 -50 400 200
3 400 100
4 400 100
5 400 200
6 400 150
7 400 100
8 400 100
9 400 100
10 100 Salvage 400 150
Asuume 20% capital is spent in year 0, rest in year 1
Split over two years

Profit Before Tax (calcs) Depreciation (Calcs) Taxable Profit (calcs)


Revenue-Product Cost (Capital-Salvage)/Years PBT-D

100 400-300 50 500/10 50


200 400-200 50 500/10 150 100-50
300 400-100 50 500/10 250 200-50
300 400-100 50 500/10 250 300-50
200 400-200 50 500/10 150 200-50
250 400-150 50 500/10 200 250-50
300 400-100 50 500/10 250 300-50
300 400-100 50 500/10 250 300-50
300 400-100 50 500/10 250 300-50
250 400-150 50 500/10 200 300-50
Tax (calcs) Profit After Tax (calcs) Cash Flow (calcs) CCF
TP*tax rate OCF=PBT-T CF=CM+OCF SUM(CF)
-100 -100 -100
20 50*0.4 80 80 -370 -370 -470
60 150*0.4 140 200-60 90 90 -380
100 250*0.4 200 300-100 200 200 -180
100 250*0.4 200 300-100 200 200 20
60 150*0.4 140 200-60 140 140 160
80 200*0.4 170 250-80 170 80 330
100 250*0.4 200 300-100 200 100 530
100 250*0.4 200 300-100 200 100 730
100 250*0.4 200 300-100 200 100 930
80 200*0.4 170 250-80 270 170+100 1200
(calcs) DCF (calcs) CCF (calcs)
DCF=PV(CF)=CF/(1.05)^n SUM(CF)
-100 -100 -100 -100
-100-370 -352.380952380952 -370/(1.05^1) -452.380952
-470+90 81.6326530612245 90/(1.05^2) -370.748299
-380-200 172.767519706295 200/(1.05^3) -197.98078
-180+200 164.540494958376 200/(1.05^4) -33.4402847
20+140 109.693663305584 140/(1.05^5) 76.2533787
160+170 126.856617428227 170/(1.05^6) 203.109996
330+200 142.136266026024 200/(1.05^7) 345.246262
530+200 135.367872405737 200/(1.05^8) 480.614135
730+200 128.921783243559 200/(1.05^9) 609.535918
930+270 165.756578456005 270/(1.05^10) 775.292496
Compare the NPV of two pumps using the common denominator method (discount rate=8%)

CM OC Life
Pump A $8,000 1800 4
Pump B $16,000 1600 7

Pump A NPV:
P1 P2 P3 P4
Value 8000 $5,880.24 $4,322.15 $3,176.91
Calcs 8000/(1.08)^4 8000/(1.08)^8 8000/(1.08)^12

Pump B NPV:
P1 P2 P3 P4
Value 16000 $9,335.85 $5,447.38 $3,178.49
Calcs 16000/(1.08)^7 16000/(1.08)^14 16000/(1.08)^21

Pump A has a lower NPV and so is recommended.

Calculation of Total Average Annual Cost (to assess the economic life)

Initial Purchase $800


Salvage Value 0
Maintenance Cost Increasing at a rate of $100 per year

Year Maintenance Sum Maintenance Annual Maintence Cost


SUM(Maintence) Sum Maintenance/Year
1 0 0 0
2 100 100 50 100/2
3 200 300 100 300/3
4 300 600 150 600/4
5 400 1000 200 1000/5
6 500 1500 250 1500/6

Calculation of Equivalent Annual Cost (Of Maintenance + Capital Cost)

Capital 100000
Maintenance Year*7500
Project Life 10 years
Discount rate 8% pa

Year Maintenance PV(Maintenance) SUM(PV(Maintenance))


P=F/(1.08)^n
0 0 0
1 0 0 0/(1.08)^1 0
2 7500 6430.04115226337 7500/(1.08)^2 6430.04115226337
3 15000 11907.4836153025 15000/(1.08)^3 18337.5247675659
4 22500 16538.1716879202 22500/(1.08)^4 34875.6964554861
5 30000 20417.4959110126 30000/(1.08)^5 55293.1923664987
6 37500 23631.3610081164 37500/(1.08)^6 78924.5533746151
7 45000 26257.067786796 45000/(1.08)^7 105181.621161411
8 52500 28364.1164363537 52500/(1.08)^8 133545.737597765
9 60000 30014.9380278875 60000/(1.08)^9 163560.675625652
10 67500 31265.5604457162 67500/(1.08)^10 194826.236071369
P5 P6 P7
$2,335.12 $1,716.39 $1,261.59
8000/(1.08)^16 8000/(1.08)^20 8000/(1.08)^24

P5
$2,523.19
16000/(1.08)^28

Annual Investment Cost Average Annual Cost


Year 1 Investment/Year Annual Maintenance+Annual Investment
800 800 800
400 800/2 450
266.666666666667 800/3 366.666666666667
200 800/4 350
160 800/5 360
133.333333333333 800/6 383.333333333333

Equivalent Maintenance Annual Cost Equivalent Annual Cost of Capital Recovery


SUM(PV(Maintenance))/Year Annuity=Equipment Cost*(1.08)^n* (0.08/(1.08^n-1)
108000
3215.02057613169 6430/2 56076.9230769231
6112.50825585531 18337/3 38803.3514046328
8718.92411387153 34875/4 30192.0804454039
11058.6384732997 55293/5 25045.6454566836
13154.0922291025 78925/6 21631.538622901
15025.9458802016 105181/7 19207.240142841
16693.2171997206 133546/8 17401.4760591822
18173.4084028503 163561/9 16007.9709171995
19482.6236071369 194826/10 14902.9488697075
P8 NPV
$927.31 27619.7138312122
8000/(1.08)^28 SUM(P1:P8)

NPV
36484.9043444414
SUM(P1:P8)

ual Maintenance+Annual Investment


800
400+50
267+100
200+150
160+200
133+250

Cost of Capital Recovery Total Equivalent Annual Cost


quipment Cost*(1.08)^n* (0.08/(1.08^n-1) Annuity+EMAC
100000*1.08^1*(0.08/(1.08^1-1)) 108000
100000*1.08^2*(0.08/(1.08^2-1)) 59291.9436530547
100000*1.08^3*(0.08/(1.08^3-1)) 44915.8596604881
100000*1.08^4*(0.08/(1.08^4-1)) 38911.0045592754
100000*1.08^5*(0.08/(1.08^5-1)) 36104.2839299834
100000*1.08^6*(0.08/(1.08^6-1)) 34785.6308520035
100000*1.08^7*(0.08/(1.08^7-1)) 34233.1860230426
100000*1.08^8*(0.08/(1.08^8-1)) 34094.6932589028
100000*1.08^9*(0.08/(1.08^9-1)) 34181.3793200497
100000*1.08^10*(0.08/(1.08^10-1)) 34385.5724768444
Cash Flow and Profitability Anaylysis of Chemical Plant

Porject Life: 2 years, construction


10 years, operation
Land cost 10 million
FCI, Year 1 90 million
FCI, Year 2 60 million
Working Capital 30 million
Revenue 95 pa, starting Year 3
Tax rate 45 %
Depreciation Begins Year 3, for 5 years, single declining (40%)
Salvage is BV
COM Cost of Manufacture 30

Year Capital Movement Depreciation Value


(Book Value *0.4)
0 -10 -10
1 -90 -90 0
2 -90 -60-30 0
3 60
4 36
5 21.6
6 12.96
7 7.776
8
9
10
11
12 30 WC

Sensitivity Analysis
NPV obtained by changing one variable and Finding

Variation in Revenue
-30% -20% -10%
Revenue 66.5 76 85.5
NPV (d(Revenue)) 37.7011390711306 74.2962093704419 110.891279669753
Working Capital 21 24 27
NPV(d(Working Capital)) 150.638078511589 149.587502330747 148.536926149906
Tax Rate 31.5 36 40.5
NPV((d(Tax Rate)) 195.241801366901 179.323317567622 163.404833768343
Sensitivity Analysis
300

250

200
Revenue
150 Working Capital
NPV

Tax Rate
100

50

0
-40% -30% -20% -10% 0% 10% 20% 30% 40%
% Change from Most Likely Value
(recovered)

in Year 2

eclining (40%)

Capital Book Value Revenue COM Profit Before Tax


(Book Value *0.4) (BV-Dep) (Revenue-COM+CM)

90
150
150*0.4 90 95 30 65 95-30
90*0.4 54 95 30 65 95-30
54*0.4 32.4 95 30 65 95-30
32.4*0.4 19.44 95 30 65 95-30
19.44*0.4 11.664 95 30 65 95-30
11.664 95 30 65 95-30
11.664 95 30 65 95-30
11.664 95 30 65 95-30
11.664 95 30 65 95-30
11.664 95 30 86.664 95-30+BV+LS

0% 10% 20% 30%


95 104.5 114 123.5
147.486349969064 184.081420268376 220.6764905677 257.271560866998
30 33 36 39
147.486349969064 146.435773788223 145.3851976074 144.33462142654
45 49.5 54 58.5
147.486349969064 131.567866169786 115.6493823705 99.7308985712279
Taxable Profit Tax Profit After (OCF) CF CCF DCF
(PBT-Dep) (TP*45%) (PBT-Tax) CF=CM+OCF SUM(CF) DCF=PV(CF)=CF/(1.05)^n
-10 -10 -10
-90 -100 -85.7142857142857
-90 -190 -81.6326530612245
5 2.25 62.75 62.75 -127.25 54.2058093078501
29 13.05 51.95 51.95 -75.3 42.7393935654383
43.4 19.53 45.47 45.47 -29.83 35.6269347893208
52.04 23.418 41.582 41.582 11.752 31.0291286229442
57.224 25.7508 39.2492 39.2492 51.0012 27.8936736625432
65 29.25 35.75 35.75 86.7512 24.1970071925256
65 29.25 35.75 35.75 122.5012 23.0447687547863
65 29.25 35.75 35.75 158.2512 21.9473988140821
65 29.25 35.75 35.75 194.0012 20.9022845848401
86.664 38.9988 47.6652 77.6652 271.6664 43.2468894502438

NPV
Cumulative DCF
SUM(DCF)
-10
-95.7142857142857
-177.34693877551
-123.14112946766
-80.4017359022218
-44.774801112901
-13.7456724899567
14.1480011725865
38.345008365112
61.3897771198983
83.3371759339804
104.239460518821
147.486349969064

147.486349969064
Plot cumulative discounted cash flow vs. time. Define the break-even point.

Year Cumulative DCF


SUM(DCF) Cumulative DCF (NPV of Revenue)
0 -10 200
1 -95.7142857142857
2 -177.34693877551 150
3 -123.14112946766 100
4 -80.4017359022218 Cumulative DCF (NPV
50
5 -44.774801112901 Revenue)
6 -13.7456724899567 0
0 2 4 6 8 10 12 14
7 14.1480011725865 -50
8 38.345008365112
-100
9 61.3897771198983
10 83.3371759339804 -150
11 104.239460518821 -200
12 147.486349969064

Calculate NPV for discount rates of 5, 10, 15,20, 25%


Change discount rate from 5%.
Note IRR when NPV=0

Conduct Sensitivity Analsyis

Sensitivity Analysis
NPV obtained by changing one variable and Finding

Variation in Revenue
-30% -20% -10% 0% 10% 20% 30%
Revenue 66.5 76 85.5 95 104.5 114 123.5
NPV (d(Rev 37.7011390711306 74.29621 110.8913 147.4863 184.0814 220.6765 257.2716
Working Ca 21 24 27 30 33 36 39
NPV(d(Work150.638078511589 149.5875 148.5369 147.4863 146.4358 145.3852 144.3346
Tax Rate 31.5 36 40.5 45 49.5 54 58.5
NPV((d(Tax 195.241801366901 179.3233 163.4048 147.4863 131.5679 115.6494 99.7309

Sensitivity Analysis
300

250

200 Revenue
150 Working
NPV

Capital
100 Tax Rate

50

0
-40%-20% 0% 20% 40%
% Change from Most Likely Value
Capital

N
100 Tax Rate

50

0
-40%-20% 0% 20% 40%
% Change from Most Likely Value
of Revenue)

Cumulative DCF (NPV of


Revenue)

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