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Net cash flow from operation

1 2 3
Sales in units 68000 79000 105000
Sales in $ 18700000 21725000 28875000
less variable cost 6596000 7663000 10185000
less fixed cost 3400000 3400000 3400000
less depreciation 2929450 5020450 3585450
Earnings before taxes 5774550 5641550 11704550
less taxes 2021092.5 1974542.5 4096592.5
Earnings after taxes 3753457.5 3667007.5 7607957.5
add deprecation 6682907.5 8687457.5 11193407.5
less/ working capital 3740000 605000 1430000
add equipment value net of taxes
Net cash flows after taxes 2942907.5 8082457.5 9763407.5

Depreciation under MACRS


1 14.29 20500000 2929450
2 24.49 20500000 5020450
3 17.49 20500000 3585450
4 12.49 20500000 2560450
5 8.93 20500000 1830650
6 8.92 20500000 1828600
7 8.93 20500000 1830650
8 4.42 20500000 906100
20491800

Note:
1 we are assuming that the development cost is included in the fixed cost.
2 All working capital will be recouped in the 5th year.
3 The book value of equipment is more than the market value at the end of 5the year hence the tax
on the loss has been adjusted to determine the cash flow from equipment at the end of 5th year.

1)
Payback period Net flow Cumulative
1 2942908 2942908 1
2 8082458 11025365 1
3 9763408 20788773 0.97
4 9499258 30288030
5 14276271 44564301
2.97 years
or
3 years
2)
Profitability index Net flow D.F - .12 PV
1 2942908 0.89 2627595.98
2 8082458 0.8 6443285.63
3 9763408 0.71 6949400.61
4 9499258 0.64 6036949.87
5 14276271 0.57 8100739.28
30157971.38

PI - 1.47

3)
0 (20,500,000)
1 2942908
2 8082458
3 9763408
4 9499258
5 14276271

IRR 26.14%

4)
Present value of inflows 30157971.38
less initial investment (20,500,000)
NPV positive 9,657,971

5)
Sensitivity analysis by using break even point
Contribution margin 275-97 178

Highest fixed cost 8420450

Contribution margin required to make


cover fixed cost 106.59
add variable cost 97
The selling price may be reduced to 203.59

At this selling price break even is


204-97 107
78695.79 units
The price may be reduced by
275-204 71
in % 0.26
If the price decreases by around 25% company will be in no profit no loss situation

6)
Break even at the current price 47305.9

The difference in quantity


79000-47305 31695
If qty is decrease by 0.4

If decrease in quantity is 40% the company will be in no profit no loss situation.

7)
Keeping in view the NPV and IRR the company can go for this project.

8)
Definitely the affect of decrease in sales should be taken as it will reduce the profitability of the comp
4 5
83000 64000
22825000 17600000
8051000 6208000
3400000 3400000
2560450 1830650
8813550 6161350
3084742.5 2156472.5
5728807.5 4004877.5
8289257.5 5835527.5
-1210000 -4565000 0
3875743
9499257.5 ###

15926450 20500000
4573550 3500000
-1073550
-375742.5
3875743

of 5the year hence the tax benefit


at the end of 5th year.

9474635
he profitability of the company as well.