Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionIV. Capital Budgeting 10. Making Capital
Investment Decisions(^370) © The McGraw−Hill
Companies, 2002
The projected income statements, therefore, are as follows:
Based on this information, the operating cash flows are:
We now have to worry about the nonoperating cash flows. Net working capital
starts out at $1,150,000 and then rises to 25 percent of sales, or $1,500,000. This
is a $350,000 change in net working capital.
Finally, we have to invest $1,250,000 to get started. In four years, the book
value of this investment will be $390,500, compared to an estimated market
value of $625,000 (half of the cost). The aftertax salvage is thus $625,000 .34
($625,000 390,500) $545,270.
When we combine all this information, the projected cash flows for Project X
are:
Year MACRS Percentage Depreciation Ending Book Value
1 14.29% .1429 $1,250,000 $178,625 $1,071,375
2 24.49 .2449 1,250,000 306,125 765,250
3 17.49 .1749 1,250,000 218,625 546,625
4 12.49 .1249 1,250,000 156,125 390,500
CHAPTER 10 Making Capital Investment Decisions 341
Year
123 4
Sales $6,000,000 $6,000,000 $6,000,000 $6,000,000
Variable costs 2,400,000 2,400,000 2,400,000 2,400,000
Fixed costs 450,000 450,000 450,000 450,000
Depreciation 178,625 306,125 218,625 156,125
EBIT $2,971,375 $2,843,875 $2,931,375 $2,993,875
Taxes (34%) 1,010,268 966,918 996,668 1,017,918
Net income $1,961,108 $1,876,958 $1,934,708 $1,975,958
Year
123 4
EBIT $2,971,375 $2,843,875 $2,931,375 $2,993,875
Depreciation 178,625 306,125 218,625 156,125
Taxes 1,010,268 966,918 996,668 1,017,918
Operating cash flow $2,139,732 $2,183,082 $2,153,332 $2,132,082
Year
01234
Operating cash flow $2,139,732 $2,183,082 $2,153,332 $2,132,082
Change in NWC $1,150,000 350,000 1,500,000
Capital spending 1,250,000 545,270
Total cash flow $2,400,000 $1,789,732 $2,183,082 $2,153,332 $4,177,352