Question 1

1985
Cost Savings
Tax Shield Decrease
Order Cost
(1,050,000)
Installation Cost
Sales proceeds of old equipment
Tax savings from depreciation
0
Investment Tax Credit
Sales Proceeds Difference
Net Cash Flow
(1,050,000)
NPV
79,781.74

1986

###
-800,000
110,900
200,100
232,000
###

We need after-tax cash flow!

Plan 2
Plan 1

Depreciation (Old)
Depreciation (New)
Depreciation (Old)
Sales Proceeds of Old Equipment
Sales Proceeds of New Equipment

Question 2
Cost Savings
Order Cost
Installation Cost
Market Value of Old Equipment
Investment Tax Credit

73,000
73,000

73,000
435,000
73,000

1985

1986

(1,050,000)

###
-800,000
41,400
232,000

1987
560,000
-257,600

1988
560,000
-257,600

1989
560,000
-257,600

1990
560,000
-257,600

1991
560,000
-257,600

324,760

223,560

222,180

222,180

111,320

627,160

525,960

524,580

524,580

413,720

1992
560,000
-257,600

1993
560,000
-257,600

302,400

302,400

need after-tax cash flow! Tax-ajusted the sale proceeds!

33,000
739,000
0

32,000
518,000
0

0
483,000
0

0
483,000
0

0
242,000
0

0
0
0

0
0
0

1987
560,000

1988
560,000

1989
560,000

1990
560,000

1991
560,000

1992
560,000

1993
560,000

cost savings
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%

504000
509600
515200
520800
526400
532000
537600
543200
548800
554400
560000
565600

NPV
79,781.74

2%
3%
4%
5%
6%
7%
8%
9%
10%

571200
576800
582400
588000
593600
599200
604800
610400
616000

1994
560,000
-257,600

1995
560,000
-257,600

1996
560,000
-257,600

302,400

102,600
405,000

302,400

0
0
0

0
0
0

0
0
0
32400
135000

1994
560,000

1995
560,000

1996
560,000

1985
Cost Savings
Tax Shield Decrease
Order Cost
(1,050,000)
Installation Cost
Sales proceeds of old equipment
Tax savings from depreciation
0
Investment Tax Credit
Sales Proceeds Difference
Net Cash Flow
(1,050,000)
NPV
194,365.03

1986

###
-800,000
121,100
147,900
232,000
###

1987
560,000
-190,400

240,040

609,640

We need after-tax cash flow! Tax-ajusted

Plan 2
Plan 1

Depreciation (Old)
Depreciation (New)
Depreciation (Old)
Sales Proceeds of Old Equipment
Sales Proceeds of New Equipment

73,000
73,000

73,000
435,000
73,000

33,000
739,000
0

cost savings
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%

504000
509600
515200
520800
526400
532000
537600
543200
548800
554400
560000
565600
571200
576800
582400
588000
593600
599200
604800

9%
10%

610400
616000

1988
560,000
-190,400

1989
560,000
-190,400

1990
560,000
-190,400

1991
560,000
-190,400

1992
560,000
-190,400

1993
560,000
-190,400

1994
560,000
-190,400

165,240

164,220

164,220

82,280

534,840

533,820

533,820

451,880

369,600

369,600

369,600

ax cash flow! Tax-ajusted the sale proceeds!

32,000
518,000
0

NPV
194,365.03

0
483,000
0

0
483,000
0

0
242,000
0

0
0
0

0
0
0

0
0
0

1995
560,000
-190,400

1996
560,000
-190,400

125,400
495,000

369,600

0
0
0

0
0
0
39600
165000

1985
Cost Savings
Tax Shield Decrease
Order Cost
(1,050,000)
Installation Cost
Sales proceeds of old equipment
Tax savings from depreciation
0
Investment Tax Credit
Sales Proceeds Difference
Net Cash Flow
(1,050,000)
NPV
(38,366.22)

1986

###
-800,000
121,100
140,760
###

1987
560,000
-190,400

230,180

599,780

We need after-tax cash flow! Tax-ajuste

Plan 2
Plan 1

Depreciation (Old)
Depreciation (New)
Depreciation (Old)
Sales Proceeds of Old Equipment
Sales Proceeds of New Equipment

73,000
73,000

73,000
414,000
73,000

33,000
710,000
0

cost savings
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%

504000
509600
515200
520800
526400
532000
537600
543200
548800
554400
560000
565600
571200
576800
582400
588000
593600
599200
604800
610400
616000

1988
560,000
-190,400

1989
560,000
-190,400

1990
560,000
-190,400

1991
560,000
-190,400

1992
560,000
-190,400

1993
560,000
-190,400

1994
560,000
-190,400

161,500

123,080

88,400

88,060

88,060

43,860

531,100

492,680

458,000

457,660

457,660

413,460

369,600

ax cash flow! Tax-ajusted the sale proceeds!

32,000
507,000
0

NPV
(38,366.22)

0
362,000
0

0
260,000
0

0
259,000
0

0
259000
0

0
129000
0

0
0
0

1995
560,000
-190,400

1996
560,000
-190,400

125,400
495,000

369,600

0
0
0

0
0
0
39600
165000