CP

310 CHAPTER 8 Cash Flow Estimation and Risk Analysis

When the project’s life ends, the company will receive the “Salvage Cash Flows” as

shown in the column for Year 4 in the lower part of the table. When the company dis-

poses of the building and equipment at the end of Year 4, it will receive cash as esti-

mated back in Part 3 of the table. Thus, the total salvage cash flow amounts to $10,607

as shown on Row 103. When we sum the subtotals in Part 4, we obtain the net cash

flows shown on Row 105. Those cash flows constitute a cash flow time line,and they are

then evaluated in Part 5 of Table 8-3.

Making the Decision

Part 5 of the table shows the standard evaluation criteria—NPV, IRR, MIRR, and

payback—based on the cash flows shown on Row 105. The NPV is positive, the IRR

and MIRR both exceed the 12 percent cost of capital, and the payback indicates that

the project will return the invested funds in 3.22 years. Therefore, on the basis of the

analysis thus far, it appears that the project should be accepted. Note, though, that we

TABLE 8-3 Analysis of a New (Expansion) Project

Part 4

Cash Flow Estimation and Risk Analysis 309