Yale Univers

The Balwin Company

TF Sections: February 9th

niversity: Econ 225

n Company

s: February 9th

Econ 255: Balwing Company exercise

Operating Cash Flow

Assumptions
Price Increase / unit

2%

Cost increase / unit

10%

Tax Rate

34%

Cash Flows from Operations after tax (EBIT-Tax+D&A)

US$

Year 1
100,000.0

163,200.0

Operating expenses

(50,000.0)

(88,000.0)

tax expense

(10,200.0)

(14,688.0)

Cash Flow from Operations

39,800.0

60,512.0

Sales and Expenses

US$

Year 1

Year 2

Units

5,000

8,000

Total Sales
Production Cost / Unit
Total Cost

20.0

20.4

100,000.0

163,200.0

10.0

11.0

(50,000.0)

(88,000.0)

Year 1

Year 2

D&A Cost
US$
Machine Value
Annual D&A
D&A Schedule
Remaining D&A
Ending Book Value

Year 2

Net Income

Price per unit

Make sure you

Year 0
100,000

20,000

32,000

20.00%

32.00%

80.0%
80,000

48.0%
48,000

Tax Calculation
US$

Year 1

Year 2

Sales

100,000.0

163,200.0

Cost

(50,000.0)

(88,000.0)

D&A

(20,000.0)

(32,000.0)

30,000.00

43,200.00

(10,200.0)

(14,688.0)

Taxable income
Tax expense

Net Income

19,800.00

28,512.00

ake sure you fill in your assumptions (Yellow boxes) according to the

Year 3

Year 4

249,696.0

212,241.6

(145,200.0)

(133,100.0)

Year 5
1,298,918.6
(878,460.0)

(29,000.6)

(22,991.3)

(139,039.1)

75,495.4

56,150.3

281,419.5

Year 3

Year 4

Year 5

12,000

10,000

20.8

21.2

60,000
21.6

249,696.0

212,241.6

1,298,918.6

12.1

13.3

14.6

(145,200.0)

(133,100.0)

(878,460.0)

Year 3

Year 4

Year 5

19,200

11,520

11,520

19.20%

11.52%

11.52%

28.8%
28,800

Year 3

17.3%
17,280

Year 4

5.8%
5,760

Year 5

249,696.0

212,241.6

1,298,918.6

(145,200.0)

(133,100.0)

(878,460.0)

(19,200.0)

(11,520.0)

(11,520.0)

85,296.00

67,621.60

408,938.59

(29,000.6)

(22,991.3)

(139,039.1)

56,295.36

44,630.26

269,899.47

according to the exercise in Lecture 6

Econ 255: Balwing Company exercise

Net Capital Spending (Capex)

Capital Expenses Cash Flows

US$
Net Capital Expenses

Year 0

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

(8,500,000)

Salvage Value

US$
Machine Value
Annual D&A
D&A Schedule
Remaining D&A
Ending Book Value
Taxable Capital Gain
Tax Expense
After Tax Salvage Value

Year 0
8,500,000

1,700,000

2,720,000

1,632,000

20.00%

32.00%

19.20%

80.00%

48.00%

28.80%

6,800,000

4,080,000

2,448,000

Year 4

Year 5
1,354,464

Year 4

Year 5

1,800,000

1,800,000

979,200

979,200

11.52%

11.52%

17.28%

5.76%

1,468,800

489,600

331,200

1,310,400

115,920

445,536

1,684,080

1,354,464

Make sure you fill in your assumptions (Ye

sumptions (Yellow boxes) according to the exercise in Lecture 6

Lecture 6

Econ 255: Balwing Company Exercise

Working Capital Calculations

Assumptions
Year 0
Year 2 - 4 (% sales)
Year 5

10,000.0
10%
-

Working Capital Calculations

US$

Year 0

Sales
Working Capital
(-Increase)/+Decrease in WC

Year 1
100,000.0

10,000.00
(10,000)

10,000.00
-

Make sure you fill in your assumptions (Yellow boxes)

Year 2

Year 3

Year 4

163,200.0

249,696.0

212,241.6

16,320.00

24,969.60

21,224.16

(6,320)

(8,650)

3,745

Year 5
1,298,918.6
21,224

Yellow boxes) according to the exercise in Lecture 6

Econ 255: Balwing Company exercise

Incremental After Tax Cash Flows
1

Assumptions
Discount Rate

10%

Incremental After Tax Cash Flows

US$

Year 0

Operating Cash Flow

Net Capital Expenses

Year 1
39,800

(8,500,000)

(10,000)

Total Incremental CF after tax

(8,510,000)

39,800

NPV Incremental CF after Tax

(7,308,966)

Change in WC
Opportunity Cost
Canibalism

Make sure you fill in your assumpti

Year 2

Year 3

Year 4

Year 5

60,512

75,495

56,150

281,419

1,354,464

(6,320)

(8,650)

3,745

21,224

54,192

66,846

59,896

1,657,108

your assumptions (Yellow boxes) according to the exercise in Lecture

cise in Lecture 6

Problem Sets
1. Compare the investment Criteria
Use a chart
Payback periods:
IRR
PI
NPV

A
B

Surer the better; better to get the money back as soon as poss
Accept if IRR is larger than reference interest rate ; the larger t
PI > 1; the larger the better
NPV > 0; the larger the better

2 Initial Investment
-$
1,000
-$
2,000

341.2
1290

IRR
NPVA
NPVB

20%
0.00 -$
0.08

-$
-$

Exercise 3

See Net Capital Expenses

Exercise 4
Year

Cash Flow

350
943

400
300

0.01

0
1
2
3

-10000
5000
4000
3000

11% If IRR>9%, do the project

0
-$4,100

1
970
-$3,130

2
970
-$2,160

0
-$6,200

1
970
-$5,230

Payback Period
2
3
970
970
-$4,260
-$3,290

4
970
-$2,320

0
-$8,000

1
970
-$7,030

2
970
-$6,060

Payback Period
3
970
-$5,090

4
970
-$4,120

Exercise 6
3
970
-$1,190

Payback Period
Exercise 8
DCF = [(P - Vcost)*Q - Fcost], (1-tax) + (Tax* depreciation/year)
P = 50
Q = 90000
Tax rate = 34%

4
970
-$220

Vcost = 45

Fcost = 180000

Price
Variable Costs
Fixed Costs
Tax Rate
Units Sold
Depreciation
Years
Capital Cost
OCF
Percentage Change

Year

$50
$45
$180,000
34%
90000
$112,500
4
$450,000
$216,450
3.3
$29,700
29700

Depreciation: $450,000/4
$50
$45
$180,000
34%
81000
$112,500
4
$450,000
$186,750
-13.7%

Cash Flow
0
1
2

-100
50
100

Initial Cost
Capital Cost
Annual Savings
Tax Rate
Annual Depreciation
Sale Price
After-Tax Salvage Val
OCF
Annuity
Capital Future
NPV

-420000
-30000
140000
34%
-84000
60000
39600
120960
$458,533.57
$43,216.12
$51,749.69

Exercise 9
Initial Cost
Annual Depreciation
Sales
Price/Unit
Variable Cost/Unit
Fixed Costs
Tax Rate

-$700,000
-$87,500.00
75000 yearly
$40
$20
$800,000 yearly
35%

28% If IRR>9%, do the project

Discount Rate
Periods

8 years

10%
5

Required Return
Annuity
NPV

15%
$2,179,155.51
$1,479,155.51

the money back as soon as possible; will still accept if the Payback period is shorter than the cut of the years
erence interest rate ; the larger the better

500
200

RR>9%, do the project

5
970
$750

6
970
$1,720

4.22680412
5
970
-$1,350
6.39175258
5
970
-$3,150

7
970
$2,690

8
970
$3,660

Don't have interest rate, so we can't know when

6
7
8
970
970
970
-$380
$590
$1,560

6
970
-$2,180

8.24742268

% = 100/150 - 1%

Don't have interest rate, so we can't know when

7
8
9
10
970
970
970
970
-$1,210
-$240
$730
$1,700
Don't have interest rate, so we can't know when

RR>9%, do the project

Years

Base-Case Cash Flow

$485,625.00

-$700,000
-$87,500.00
74500
$40
$20
$800,000
35%

15%
$2,149,987.92
$1,449,987.92
58.3351796
$29,167.59
29167.5898

er than the cut of the years

Base-Case Cash Flow

8 years
yearly

yearly

$479,125.00