Winston & Holmes
Step 1
Initial Capital Investment
$ (1,300,000.00)
Step 2
Initial Working Capital Investment Step 3
$ (1,200,000.00) After Tax Operating Income 15% 25%
Cost of Capital Tax Rate
$ 1,331,319.50 0 1
Year Sales % change in sales Sales growth(Inflation adjusted) Advertising
2,958,487.78
2
1,242,564.87 0.30 0.42 185,502.00
1,400,930.98 0.11 0.13 166,951.80
Employees Salaries
55,680.00
55,680.00
Rent
66,995.52
66,995.52
50,000.00 52,500.00 831,887.35 623,915.51
52,500.00 1,058,803.66 794,102.74
0.870 542535.2267
0.756 600455.7608
1
2
Party Utlity Exp S-C (S-C)(1-T) PVIF (Present value interest factor) PV of each item PV of Operating Income
2,958,487.78 2,218,865.84
$
4,175,324.51
Step 4
Year NWC Requirement Change in NWC
0
$1,200,000.00
$1,704,000.00 $1,921,176.47 -$504,000.00 -$217,176.47 (Negative Sign signifies that there is a cash outflow. If NW
PV of each item PV of NWC change
$
-$438,260.87
-$164,216.61
1
2
1
2
(652,711.77)
Step 5 0
Year
Salvage PV of Salvage
$
6,179.62
Step 6 0
Year
Working Capital Released PV of W.C. Released
$
616,426.08
Step 7
CCA Tax Shield Calculation CCA Rate Tax Rate
20% 25%
PV of CCA Tax Shield
$
PV of Lost Tax Shield (dues to Salvage Value)
$
Step 8
173,602.48
= {(C*d*T}/(d + k )}{(1+0.5k)/(1+k)} Where, C is the initial capital investm
(882.80) = - {(So*d*T}/(d + k )} OR = - {(Sn*d* Where, Sn is the salavage value at the
Finding out the Net Present Value You need to add up all the values found in step 1 - 7. NPV =
Decision
$1,817,938.11
1.727
Project's NPV is Positive --> Accept the Project
Note: This approach is easier and tim e saving. But we don't kno w the project cash flo w each year.
Alternative Approach: Capital Budgeting: Practice Problem 1 Step 1
Initial Capital Investment
-1300000
Step 2
Initial Working Capital Investment
-1200000
Step 3
CCA Rate
CCA calculation
Tax Rate Year 1 2 3 4 5 6 7 8 9 10
$ $ $ $ $ $ $ $ $ $
Beginning UCC 1,200,000.00 1,080,000.00 864,000.00 691,200.00 552,960.00 442,368.00 353,894.40 283,115.52 226,492.42 181,193.93
CCA $ 120,000.00 $ 216,000.00 $ 172,800.00 $ 138,240.00 $ 110,592.00 $ 88,473.60 $ 70,778.88 $ 56,623.10 $ 45,298.48 $ 36,238.79
$ $ $ $ $ $ $ $ $ $
Ending UCC 1,080,000.00 864,000.00 691,200.00 552,960.00 442,368.00 353,894.40 283,115.52 226,492.42 181,193.93 144,955.15
Step 4
Year
0
NWC Requirement Change in NWC
Step 5
1
2
1200000
1704000 1921176.471 -504000 -217176.4706 (Negative Sign signifies that there is a cash outflow. If NW Project Operating Cash Flow Calculation
Cost of Capital
15%
Year
1
2
Sales V Cost F Cost S-C D (= CCA)
1242564.868 185502 0 1057062.868 120000
1400930.978 166951.8 0 1233979.178 216000
S-C-D (S-C-D)*(1-T)
937062.8676 702797.1507
1017979.178 763484.3836
(S-C-D)*(1-T) + D
822797.1507
979484.3836
1
2
-504000
-217176.4706
822797.1507
979484.3836
Step 6
0
Project total cash flow
Year
0
Initial Investment
-1300000
Initial net working capital
-1200000
Change in NWC Operating Cash Flow {(S-C-D)(1-T)+D} Working capital release
Salvage value Cash Flow
-2500000
318797.1507
762307.913
PVIF
1 -2500000
0.869565217 277214.9137
0.756143667 576414.301
Discounted Cash Flow
1979919.191
PV of Cash Flow
Step 7
Adjustment for Lost Tax Shield (due to salvage) Salvage Value =
0
{(UCC - Sn)*d*T}/(d + k ) = Where,
UCC is the Undepreciated capital Cost at the end of Proje Sn is the salvage Value at th end of the project life d is the CCA rate T is the tax rate k is the cost of capital
PV of lost tax shield adjustment: Step 8
10577.25
Calculating NPV = PV of Project Cash Flow + PV of lost tax shield adju NPV =
Decision
32356.05943
1990496.44
Project's NPV is Positive --> Accept the Project
Note: This approach is m ore intuitive and we see the project cash flow each year. But it is m ore tim
Sales $ 2,958,487.78 $ 1,242,564.87
Rent 66995.52
3
4
5
6
7
8
1,579,481.00 0.11 0.13 150,256.62
1,548,510.79 -0.02 -0.02 135,230.96
1,518,147.83 -0.02 -0.02 121,707.86
1,488,380.23 -0.02 -0.02 121,707.86
1,459,196.30 -0.02 -0.02 121,707.86
1,430,584.61 -0.02 -0.02 121,707.86
55,680.00
55,680.00
55,680.00
55,680.00
55,680.00
55,680.00
66,995.52
66,995.52
66,995.52
66,995.52
66,995.52
66,995.52
52,500.00 1,254,048.86 940,536.65
52,500.00 1,238,104.31 928,578.23
52,500.00 1,221,264.45 915,948.34
52,500.00 1,191,496.85 893,622.63
52,500.00 1,162,312.92 871,734.69
52,500.00 1,133,701.23 850,275.92
0.658 618418.1137
0.572 530917.6187
0.497 455388.2042
0.432 386337.7251
0.376 327717.3588
0.327 277956.7067
3
4
5
6
7
8
$2,166,032.30 $2,123,561.07 $2,081,922.62 -$244,855.82 $42,471.22 $41,638.45 C increases there will be Cash Outflow)
$2,041,100.61 $40,822.01
$2,001,079.03 $1,961,842.18 $40,021.58 $39,236.84
-$160,996.68
$24,283.06
$20,701.67
$17,648.48
$15,045.59
$12,826.59
3
4
5
6
7
8
3
4
5
6
7
8
nt T}/(d + k )}{1/(1+k)^n} end of the project's life
20% 25%
3
4
5
6
7
8
2166032.295 2123561.074 2081922.621 -244855.8247 42471.22148 41638.45243 C increases there will be Cash Outflow)
2041100.609 40822.01218
2001079.029 40021.58057
1961842.185 39236.8437
3
4
5
6
7
8
1579481.005 150256.62 0 1429224.385 172800
1548510.789 135230.958 0 1413279.831 138240
1518147.832 121707.8622 0 1396439.97 110592
1488380.228 121707.8622 0 1366672.366 88473.6
1459196.302 121707.8622 0 1337488.44 70778.88
1430584.61 121707.8622 0 1308876.747 56623.104
1256424.385 942318.2886
1275039.831 956279.8733
1285847.97 964385.9776
1278198.766 958649.0742
1266709.56 950032.1697
1252253.643 939190.2325
1115118.289
1094519.873
1074977.978
1047122.674
1020811.05
995813.3365
3
4
5
6
7
8
-244855.8247
42471.22148
41638.45243
40822.01218
40021.58057
39236.8437
1115118.289
1094519.873
1074977.978
1047122.674
1020811.05
995813.3365 1961842.185
0 870262.4639
1136991.095
1116616.43
1087944.686
1060832.63
2996892.365
0.657516232 572211.6965
0.571753246 650078.3486
0.497176735 555155.7113
0.432327596 470348.5108
0.37593704 398806.2789
0.326901774 979689.4302
(At the end of Project life) t Life
tment
e consuming.
Data
Starting Year Current Sales - 1996 Yorkvilles sales 1st sales increas 2-4 yrs sales increase Full-time wage$/hr additional Full Time Part-time wage$/hr Additional part time employees Yorkville increas sq. footage Yorkville hours of ops/week weeks/yr store close for _____ days 9
10
1,402,533.93 -0.02 -0.02 121,707.86
1,375,033.27 -0.02 -0.02 121,707.86
1996 5100841 58% 45% 15% 12 2 10 1 1875 87 52 5
Inventory Turonver =COGS/Inventory Days sales in inventory 365 days/Inventory Turnover Inventory = COGS/(365/Days sales in inventory)
55,680.00
55,680.00
66,995.52
66,995.52
52,500.00 1,105,650.55 829,237.91
52,500.00 1,078,149.88 808,612.41
0.284 235721.1689
0.247 199876.6216
9
10
$1,923,374.69 $1,885,661.46 $38,467.49 $37,713.23
$10,934.86
$9,322.13
9
10
$25,000.00
9
10
$1,885,661.46
Investmesnts
Costs
Contingency Furnitute Ttl Investments F&F useful life
$ 100,000.00 $ 1,200,000.00 $ 1,300,000.00 $ 10.00
Electricity (per sq. ft) per month Gas (per sq. ft) per month Water (per sq. ft.) per month Rent increase (on overall rent)
St. line depreciation/yr Salvage Value
$ $
Current Rent Annual maintenance (option 1) Annual maintenance (option 2) Annual maintenance is tax deductible
117,500.00 25,000.00
Working Capital
Gross Margin Inventory Days of COGS Decrease in days New inventory days
46.50% 118 20
Advertising expense (current) Advertising 1st year increase Adv. Decrease in subsequent yrs Gran Opening
98 Inflation
CCA: Furniture & Fixture Discount Rate Tax rate
1 0.25 0.5 38% 176304 117500 = CCA 185502 100% 10% up to year 6 $50,000.00
2% 20% 25%
yorkville ft pt weekdays weekends hrs/week hrs/year cost
other (x2) 12 10 13 hrs 11 hrs 87 4524 $ 597,168.00
2 fulltime hrs yearly cost
80hrs/week 3840 108576
1 part time hrs yearly cost
20hrs/week 960 45240
total cost
153816
4 2
8 weekdays
11 hrs 132 6864 $ 1,208,064.00
ttl cost
$
1,805,232.00
