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Class Week Starting On 11.03.2019

Here are the steps to solve this problem: 1. Build a spreadsheet model with columns for: - Year - Demand (starting at 10,000 units in year 1 and increasing by given growth rates) - Potential capacity levels (starting at 10,000 units and increasing in increments) - Revenue (demand x unit price) - Variable costs (demand x unit variable cost) - Capacity costs (capacity level x unit capacity cost) - Depreciation (capacity costs / 5) - Profit before tax (revenue - variable costs - capacity costs + depreciation) - Taxes (profit before tax x tax rate) - Profit after tax 2. Calculate NPV

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Jeeva Kumar
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53 views16 pages

Class Week Starting On 11.03.2019

Here are the steps to solve this problem: 1. Build a spreadsheet model with columns for: - Year - Demand (starting at 10,000 units in year 1 and increasing by given growth rates) - Potential capacity levels (starting at 10,000 units and increasing in increments) - Revenue (demand x unit price) - Variable costs (demand x unit variable cost) - Capacity costs (capacity level x unit capacity cost) - Depreciation (capacity costs / 5) - Profit before tax (revenue - variable costs - capacity costs + depreciation) - Taxes (profit before tax x tax rate) - Profit after tax 2. Calculate NPV

Uploaded by

Jeeva Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Plan of Coverage

1. Equivalence in cash flow


2.Concept of NPV, NFV & IRR - revisit
3. Equated Annual Worth
Given the Investment and Operating Expenses schedule, find (i) Net
Present Value (ii) Equated Annual Worth (iii) IRR

Rate of int 10%


Year Investment Operating Income
0 -600
1 500
2 400
3 -600 300
4 500
5 400
6 -600 300
7 500
8 400
9 300

NPV

EAW
Rate of int 10%
Amount
End of
of
Period
Deposit
0 800
1-9 1500
10 0

Compute the Future vaus of a series of cash flow as give in the ta


of interest.
es of cash flow as give in the table at 10% rate
Rate of Int 12%
Year Cash Flow
0 -10000
1 0
2 0
3 0
4 0
5 0 If an amount of 10,000is borrowed and has to be repaid through equal
installments in 5 years starting from end of 1st year, how much should
be the each year's cash outflow for the borrower?
to be repaid through equal
1st year, how much should
ower?
A company is considering two methods for obtaining a certain part.

Method A will involve purchasing a machine for $50,000 with a life of 5 years, a $2,000 salvage value and a fixed annual oper
$10,000. Additionally, each part produced by the method will cost $10.

Method B will involve purchasing the part from a subcontractor for $25 per part.

At an interest rate of 10% per year, what is the number of parts per year required for the two methods to break even. (that is
is the same irrespective of the method used)
ge value and a fixed annual operating cost of

o methods to break even. (that is the total cost


End of Withdra
Deposit
period wal
0 P
Find for what value of P the futur
1-6 1000 depicted here will be 0.
7 500
8-10 1000

Rate of int 10%


nd for what value of P the future value of the cash flows
epicted here will be 0.
The Information Technology Company (ITC) is considering the purchase of a new minicomputer for data processing. The purch
price is $150,000 delivered and installed. It has been estimated that the new computer will produce annual savings of $50,00
enhanced productivity as compared with the current computer. ITC assumes that the new computer will have an economic lif
five years, at which time it will be essentially obsolete and have zero salvage value over the costs of removal. The present com
which is fully depreciated, is in good working order and could conceivably be used for at least five more years, but its present
salvage value is zero, net of all costs of removal. The company has adopted an MARR of 12%. For ease of calculation assume t
marginal tax rate is 50%, that the new computer will be straight-line depreciated over no less than five years and that the cash
occurs at the end of the year.
(i) Show that the company cannot justify the computer purely on economic grounds?
(ii) What would be the salvage value of the present computer have to make the new computer attractive? Assume that the sa
income is subject to the 50% tax rate.
er for data processing. The purchase
roduce annual savings of $50,000 in
mputer will have an economic life of
osts of removal. The present computer,
five more years, but its present
For ease of calculation assume that the
than five years and that the cash flow

er attractive? Assume that the salvage


Rate of Int 10%
Year (end) Cash Flow
0 -100
1 30
2 35
Fill in the cells coloured.
3 50
4 60
5 60

NPV
Future Value
Eqtd Yrly Amt (using FV)
Eqtd Yrly Amt (using PV)

FV from pmt
PV from pmt
Fill in the cells coloured.
Case Acron Pharma

Acron is a large drug company. One of its new drugs, Niagara, is coming to market and Acron needs
how much annual production capacity to build for this drug. Government regulations make it difficu
capacity at a later date, so Acron must determine capacity recommendation before the drug comes
drug will be sold for 20 years before it comes off patent. After 20 years, the right to produce the dru
worthless. Acron has made the following assumptions:
Year 1 demand will be 10,000 units
During years 2-6, annual growth of demand will be 15%
During years 7-20, annual growth rate will be 5%
It costs $6, payable at the end of year 1 to build each unit of annual production capacity. The cost of
capacity is depreciated at a straight line 5-year basis.
During year 1, Niagara will sell for $8 per unit and will incur a variable cost of $5 to produce.
Cost of maintaining a unit of capacity during year 1 is $1.
The unit price, unit variable cost and unit capacity maintenance cost will increase by 5% per year.
Profits are taxed at 40%
All cash flows are assumed to incur at the end of each year and the corporate discount rate is 10%.

Acron wants to develop a spreadsheet model of its 20-year cash flows. Then it wants to answer the
questions:
What capacity level should be chosen?
How does a change in the discount rate affect the optimal capacity level?
ming to market and Acron needs to determine
ment regulations make it difficult to add
endation before the drug comes to market. The
ars, the right to produce the drug will be

production capacity. The cost of building

le cost of $5 to produce.

t will increase by 5% per year.


corporate discount rate is 10%.

ws. Then it wants to answer the following

evel?

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