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1) Incremental Cash Flow: The change in a firm’s net cash flow attributable to an investment
project. This must be taken under consideration.

Cash Flow:
unit price 2
unit sales 200000
Revenue 400000
Cash Operating Cost -300000
Depreciation -99000
Externality -10000
EBT -9000
Tax -3600
NI 5400
Add Depreciation 99000
Net operating Cash Flow 93600

Salvage Value 25000

Salvage Value Tax -10000
Recovery of NWC 15000
Project NCF 114600

2)
No, we should not consider this expense in our project because rehabilitation cost is basically a
"Sunk cost". A cash outlay that has already been incurred and can not be recovered regardless
whether the project is accept or reject!!, like the cost of feasibility study. On the other hand
this expense should be included in the project because, if the rehabilitation expense had not
taken place, the firm would have had to spend the $100000 to make the site suitable for the
Lemonade project.

4)
Investment year "0"

Machinery’s 250000
Shipping Cost 20000
Installation Fees 30000
McReath's Inventory's 10000
Total 310000 (Figures in $)
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Cash Flow at the Year "4"

Unit Price 2
Unit Sales 200000
Revenue 400000
Cash Operating Cost -300000 (Figures in $)
Depreciation -21000
net Externality Cost -10000
EBT 69000
Tax -27600
NI 41400
Plus Depreciation 21000
Net OCF 62400
Salvage Value 25000
Salvage Value Tax -10000 (Figures in $)
NWC 6000
Net Terminal CF 21000
Project NCF 83400

5) (Figures in $)
Year-0 Year--1 Year--2 Year--3 Year--4
Unit Price 2 2 2 2 2
Unit Sales 200000 200000 200000 200000
Revenue 400000 400000 400000 400000
Cash Operating Cost -300000 -300000 -300000 -300000
Depreciation -99000 -135000 -45000 -21000
net Externality Cost -10000 -10000 -10000 -10000
EBT -9000 -45000 45000 69000
Tax -3600 -18000 18000 -27600
NI -5400 -27000 27000 41400
Plus Depreciation 99000 135000 45000 21000
Net OCF 93600 108000 72000 62400
Salvage Value 25000
Salvage Value Tax -10000
NWC 6000
Net Terminal CF 21000
Project NCF 83400

NPV= -24594.90
=-310000+93600/1.1+108000/1.12+72000/1.13+83400/1.14
IRR= 10% + ((20%-10%)*(-24595/ (-24595+651134)) = 9.61%
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Payback Period:

Payback Period:

Year CF Cumulative CF
0 -310000 -310000
1 93600 -216400
2 108000 -108400
3 72000 -36400
4 83400 47000
Payback period = 3 Years + 36400/83400 =3.44 year

8.a) If 5% increase in Sales, and 2% increase in Cash Operating Cost

Year-0 Year--1 Year--2 Year--3 Year--4

Unit Price 2 2.1 2.21 2.32 2.43
Unit Sales 200000 200000 200000 200000 200000
Revenue 400000 420000 441000 464000 486000
Cash Operating Cost -306000 -312120 -318362 -331224 -337849
Depreciation -99000 -135000 -45000 -21000
net Externality Cost -10000 -10000 -10000 -10000
EBT -1120 -22362 77776 117151
Tax -448 -8945 31110 46860
NI -672 -13417 46666 70291
Plus Depreciation 99000 135000 45000 21000
Net OCF 98328 121583 91666 91291
Salvage Value 25000
Salvage Value Tax -10000
NWC 6000
Net Terminal CF 21000
Project NCF 112291

NPV= 25437.20

=-310000+98328/1.1+121583/1.12+91666/1.13+112291/1.14

Since NPV gives us a positive value, so we can go for the project

IRR = 10% + (20%-10%) * (25437)/ [(25437-(-36427)] = 14.11%

[NPV at 20% is -36427]

Payback Period:
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Payback Period:

Year CF Cumulative CF
0 -310000 -310000
1 98328 -211672
2 121583 -90089
3 91666 -1577
4 112291 113868
Payback period = 2 Years + 90089/91666 =2.98 year

8-b)

From the problem above, we clearly observed the situation that increases in sales in every year with
consistent with cost of capital gradually gives the profitability of the company. At the end, Internal Rate
of Return will be going up because of increasing sales price. Also the payback period will be quicker than
any other else,

Therefore, we can conclude with the statement that increased sales price gives a profitable
outcome to the company if the cost of capital also consistent with the sales price consistently

9).

BEP revenue & units:

EAC= 310000
i-
PVIFA , where 10%,n=4

Equivalent Annual Cost = 97796

NI (97796-99000)= -1204
EBIT -2007
Depreciation 99000
FC +VC 300000
Revenue 396993

Break Even Revenue =   396993  

Sales Volume= 396993/2= 198496 units

**Sales volume has bee calculated considering the depreciation 99000, but the sales volume or BEP
revenue would be different if the depreciation expenses is affected by the MACRS factor. Different
percentage would give different kind of figure.

11.
PROJECT S
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a.
Year Net Cash Flow PVIF@10% Present Value
0 -100000 1 -100000
1 60000 0.909 54540
2 60000 0.826 49560
NPV 4100

PROJECT L

Year Net Cash Flow PVIF@10% Present Value

0 -100000 1 -100000
1 33500 0.909 30452
2 33500 0.826 27671
3 33500 0.751 25159
4 33500 0.683 22881
NPV 6162

REPLACEMENT CHAIN ANALYSIS

NPV chain of Project S

NPVchain = ∑NPVn /(1+k)n(t-1)

Where n=size of the replication 2
t ranges from 1 to 2 the number of replication
k is the discount rate
NPVn is the NPV of the project n

NPVchain = 4100/(1+10%)2(1-1)+4100/(1+10%)2(2-1)
NPVchian = 4100+4100/1.21
NPVchian = 4100+3388 = 7488

NPV chain = 7488

NPV chain 7488 for project S is higher than NPV 6162 of project L.
Project S should be chosen.
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b. PROJECT S

Year Net Cash Flow PVIF@10% Present Value

0 -105000 1 -105000
1 60000 0.909 54540
2 60000 0.826 49560
NPV -900

PROJECT L

Year Net Cash Flow PVIF@10% Present Value

0 -105000 1 -105000
1 33500 0.909 30452
2 33500 0.826 27671
3 33500 0.751 25159
4 33500 0.683 22881
NPV 1162

Project S is not viable due to negative NPV.

12. TRUCK PROJECT

Initial Investment and operating cash flow

Year Net Cash Flow PVIF@10% Present Value

0 -10000 1 -10000
1 4200 0.909 3818
2 4000 0.826 3304
3 3500 0.751 2629
NPV -250

End year abandonment cash flow

Year Net Cash Flow PVIF@10% Present Value

0 -10000 1 -10000
1 6200 0.909 5636
2 4000 0.826 3304
NPV -1060
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NPV AFTER 2 YEARS

Economic Life 3 years

Cost: 10000
Salvage value after 2 years 3333

Year Net Cash Flow PVIF@10% Present Value

0 -10000 1 -10000
1 6200 0.909 5636
2 4000 0.826 3304
3 3300 0.751 2478
NPV 1418

NPV AFTER 1 YEAR

Economic Life 3 years

Cost: 10000
Salvage value after 1 year 6667

Year Net Cash Flow PVIF@10% Present Value

0 -10000 1 -10000
1 6200 0.909 5636
2 6667 0.826 5507
NPV 1143