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Chapter 3: Estimating Project Cash Flows


1. A new investment project is to demolish an existing gas station and construct a small shopping mall. Which of the items should be treated as incremental cash flows relevant to the investment decision? a. The current value of the land. b. The current value of the gasoline- retailing business. c. The cost of wrecking the gas station, digging up the tanks, and cleaning the land. d. The cost of new antipollution devices installed b order of the local government six months ago. e. !ost earnings on other real estate projects owing to staff time that will be spent if the mall is built. f. An allocated portion of the depreciation from the compan "s head#uarters building. g. The fee that has alread been paid to an architect for designing the mall. h. $uture noncash expenses such as depreciation that will result if the mall is built. i. Allocation of corporate overhead to the project. Answer: The incremental cash flows relevant to the decision include items a, b, c, e, and h. The current value of the land a! is used b" both the gas station and the mall. #owever, the land ma" be sold$ therefore, its value is incremental as an opportunit" cost!. %tems d! and g! are sun& costs. %tems f! and i! represent suspicious allocations of corporate overhead to the mini'mall project. %n effect, the owner must e(amine the following three alternatives and select the one with the ma(imum value: i! )eep the gasoline business and either continue to operate it or sell it to someone else. ii! Tear the gasoline station down and selling the land. iii! Tear the gasoline station down and put up the shopping mall. 2. A soft drink bottler is tr ing to determine the present value of its business in an area where it forecasts no growth in unit sales. %ales this ear will be &'( million and expenses will be &)

Chapter 3: Estimating Project Cash Flows million. The present rate of return re#uired is *( percent, and inflation is expected to be '( percent indefinitel . The compan president believes that the present value of the business is &+ million, that is, &' million per ear discounted at *( percent. ,is assistant argues that the present value is &' million divided b '( percent, the expected real interest rate. This ields an -./ of &'( million. What is the correct solution to the valuation problem? Answer: *e interpret the phrase +no growth, to refer to lac& of unit sales growth. The price of soft drin&s and the corresponding e(penses are assumed to grow at the average rate of inflation. The assistant is correct$ real cash flows should be discounted at real interest rates. *e e(pect to have -./ in earnings in the ne(t "ear. %n real terms, this represents -./0 ...1! 2 1.313/, since the one "ear inflation rate is .14. %f these earnings continue to grow at the rate of inflation, then the" will be constant in real terms, so we discount the level perpetuit" of 1.313/ at the real interest rate of 3.134 5ote that . 6 nominal rate! 2 . 6 real rate! . 6 e(pected inflation!. The 5P7 is -.1/ 21.313/01.1313!. 3. 0n late ')1+, 2onald Trump, the -ew 3ork real estate developer, unveiled a plan to build the tallest building in the world on 4anhattan"s West %ide as the centerpiece of a commercial and residential complex to be known as Television 5it . ,e bought the land in ')1' for onl &1' million. 6 ')1+, its estimated value was &* billion. 70 can do things that no one else can do because 0 got the land so cheap,8 said Trump. The 2onald is 9was?: ver rich, but is he correct? Answer: Perhaps 8onald Trump presents a different face to the public. %f he uses -9./ as the cost of the propert", an" investment will loo& profitable, even the simple strateg" of selling the undeveloped propert" for -:;. <ther development strategies have to compete against this simple strateg"$ the" will not loo& as profitable in this light. %n other words, the present value of the marginal benefits of an" development project he underta&es should e(ceed the present value of the marginal costs of the development. The calculation of marginal benefits will not include the tremendous increase in the value of the land. Consider the following e(ample. =uppose the present value of the benefits of a proposed real' estate project is -.11/. #ow should Trump determine its 5P7> ?. ;. -.11/ @ -9./ 2 -.3 /illion -.11/ @ - :; 2 @-..3 ;illion

/ethod ? is consistent with TrumpAs statement. /ethod ;, however, is correct. 4. 0n 4a '))*, 064 announced plans to resell the ultra-powerful .5s of .arallan 5omputer. ,owever, according to one anal st, 70n pushing into increasingl powerful and expensive .5s, 064 runs the risk of cannibali;ing its own sales of minicomputers.8 ,ow should this possibilit be factored into 064"s investment decision? Answer: ?nswer. The real Buestion that %;/ should raise is not whether it will lose sales of its

Chapter 3: Estimating Project Cash Flows e(isting minicomputers but what will happen to sales if it doesnAt sell ParallanAs PCs. %n other words, the relevant conseBuence of sales of ParallanAs PCs for capital budgeting purposes is the incremental effect of an" cannibaliCation that occursDwhich eBuals the lost profit on lost sales that would not otherwise have been lost had the new product not been introduced. Those sales that would have been lost an"wa" should not be counted a casualt" of cannibaliCation. %n general, a projectAs incremental cash flows can be found onl" b" subtracting worldwide corporate cash flows without the investmentDthe base caseDfrom post'investment corporate cash flows. To come up with a realistic base case, and thus a reasonable estimate of incremental cash flows, the &e" Buestion that managers must as& is, +*hat will happen if we donAt ma&e this investment>, The critical error made b" man" companies is to ignore competitor behavior and assume that the base case is the status Buo. ;ut in a competitive world econom", the least li&el" future scenario is the status Buo. ? compan" that opts not to come out with a new product because it is afraid that the product will cannibaliCe its e(isting product line is most li&el" leaving a profitable niche for some other compan" to e(ploit. =ales will be lost an"wa", but now the" will be lost to a competitor. =imilarl", a compan" that chooses not to invest in a new process technolog" because it calculates that the higher Bualit" is not worth the added cost ma" discover that it is losing sales to competitors who have made the investment. %n a competitive mar&et, the rule is simple: %f "ou must be the victim of a cannibal, ma&e sure the cannibal is a member of "our famil". Failure to heed this rule led %;/ to slight investment in and sales of small computers despite the challenge from personal computers, minicomputers, and wor&stations$ small computers loo&ed less profitable to sell than %;/As mainframes. %nstead of tr"ing to figure out a wa" to compete in a world in which the advent of the microprocessor, and the powerful personal computers and wor&stations it helped create, turned computer hardware into a low'margin commodit" product, %;/ tried to protect its profitable mainframe business b" slowing down or a(ing products that were even vaguel" competitive with its mainframes. For e(ample, in the mid'.3E1s, %;/ researchers pioneered reduced instruction'set computing, or F%=C, a revolutionar" technolog" for designing faster computers. ;ut the advance wasnAt rushed into products, largel" because it was seen as a menace to %;/As mainframe business. Competitors li&e =un /icros"stems, 8ell, CompaB, and #ewlett'Pac&ard, with no mainframe business of their own to protect, too& advantage of %;/As inertia b" running rings around it in the personal computer and wor&station mar&ets =un harnessed F%=C technolog" to now lead in F%=C'based wor&stations!, stealing sales from its mainframe business an"wa". ;" tr"ing so hard not to cannibaliCe its mainframes, %;/ lost sales and profits to its competitors. %n contrast to %;/, %ntel is a model cannibal. <nce threatened b" cop"cats cloning its popular 9139G chip, the semiconductor giant responded aggressivel". %ntel slashed prices, undercutting the cloners, then rolled out a better generation of chips that will eventuall" ma&e its old lines obsolete. ?ccording to one anal"st, +%ntel said to competitors: HIouAd better run as fast as we are, because weAre destro"ing the pavement behind us as we move along.A The" plundered and burned the 39G mar&et. Trashed it. 8estro"ed it., %f %;/ fails to sell ParallanAs PCs because of a fear of cannibaliCation, it will li&el" just be repeating its past errors. 5. $lexible manufacturing s stems enable companies to respond #uickl to emerging market trends and to easil accommodate product redesigns as technolog changes. What is there in

Chapter 3: Estimating Project Cash Flows these advantages that sometimes leads companies appl ing the traditional discounted cash flow anal sis to under-invest in such s stems? That is, wh do companies sometimes underestimate the value of flexible manufacturing s stems in the sense of assigning negative -./s to positive -./ projects? Answer: Fle(ible manufacturing s"stems are often costl", difficult to administer, and hard to defend in the short term. #owever, the" ma&e it easier for a compan" to adapt to a changing technological and business environment and a more competitive mar&etplace. That is, the" give companies options that would otherwise might not e(ist. *ith such s"stems in place, the firm will find it easier to enter and capture niche mar&ets as the" emerge. The relevant base case ma" not be the status Buo, but rather, an anticipated decline in sales following competitorsA adaptations to the new technolog". This ease of adaptation has a value to the firm$ it ma" ma&e all future investments more profitable. Firms ma" underestimate 5P7 when the" fail to ta&e the option'li&e characteristics of the new technolog" into account, and mista&enl" assume that the status Buo will be maintained in the absence of adaptation. 6. 4an companies are now installing marketing and sales productivit 94%.: s stems that automate routine tasks and gather, update, and interpret data that were either scattered or uncollected before. These data include information about ever sales lead generated, ever sales task performed, and ever customer prospect closed or terminated. 2escribe some of the direct costs and benefits that might be associated with an 4%. s stem. What are some intangible benefits of an 4%. s stem as well as some hidden costs of implementing such a s stem? Answer: ?n /=P s"stem delivers tangible productivit" gains, li&e reducing paper wor&, improving the Bualit" of telephone campaigns b" pre'Bualif"ing sales leads, and increasing sales force productivit" b" reducing the time salepeople spend on non'selling tas&s such as scheduling sales calls, compiling sales reports, generating proposals and bids, and entering orders!. %ntangible benefits are more difficult to Buantif", but ma" be more important in the long run. ?n /=P s"stem trac&s ever" one of a compan"As mar&eting and sales activities, from advertising that generates sales leads to direct mail and telephone Bualification of the leads to closing the first saleDall the wa" through the life of each account. ;" anal"Cing the data the /=P s"stem gathersDdata that were previousl" unavailableDmar&eting and sales management are now able to relate mar&eting actions with mar&etplace results. ?s such, an /=P s"stem can improve the timeliness and Bualit" of mar&eting decision ma&ing and lead to more responsive customer service and deeper understanding of customers. /=P s"stems also reduce mar&eting inertia because the" streamline the implementation of mar&eting programs. /oreover, b" lin&ing orders, services delivered, and prices paid with the actual costs of lead generation, preselling, closing, distribution, and post sale support, /=P s"stems furnish the tools for anal"Cing and adjusting the mar&eting mi( personal selling, direct mail, telemar&eting, advertising, pricing, other promotional efforts! and product mi(. The direct costs of such a s"stem include the cost of the computer and telecommunications hardware, the software, and the cost of t"ing all those pieces together. E(pensive as these direct costs are, the hidden costs can double or even triple the overall cost. These hidden costs include s"stem customiCation, e(pert consulting, and end'user training. /oreover, because

Chapter 3: Estimating Project Cash Flows malfunctioning of an automated mar&eting s"stem can threaten a businessAs revenue stream, most companies will probabl" have to run both s"stemsDautomated and manualDuntil the networ& has proved out . 7. Accrued pension benefits represent an obligation of a compan for the past service of its emplo ees. -o current or future action can affect this obligation. The amorti;ation of accrued pension benefits must be recogni;ed, however, as a current expense in the compan "s financial statements. 4an companies turn around and allocate these costs to divisions. <ne compan allocated these costs in proportion to pension benefits accrued b its workers. A plant with an older work force received almost all of its division"s accrued pension costs, adding &= per hour to the plant"s labor cost relative to the cost of several newer plants with much ounger workers. a. ,ow is this allocation of accrued pension benefits likel to affect future investment decisions? The competitiveness of products manufactured b the plant? Answer: =ome positive 5P7 future investment decisions ma" be foregone if the divisions assign accrued pension benefits to the projects considered. Pension obligations committed in the past represent sun& costs. ?lso, the division in a competitive environment will be e(pected to show strong profits net of accrued pension benefits. %n a competitive mar&et, the firm ma" not be able to cut price enough to retain mar&et share if it is reBuired to price high enough to cover its accrued pension liabilities. b. %uppose that because of its high labor costs, the compan decided to shut down the older plant and shift work to the newer ones. ,ow will this decision affect the compan "s competitiveness? Answer: The compan" must still meet its accrued pension obligation. %t is possible that the shut' down will improve the compan"As competitiveness, but the merits of this decision should be evaluated in the absence of lower apparent accrued pension costs. %t is more li&el" that the compan" would become less competitive$ older wor&ers ma" be more s&illed and0or more productive than their "ounger counterparts. c. ,ow should the compan treat accrued pension benefits for investment, product sourcing, and pricing purposes? Answer: The compan" should treat e(isting pension benefits as sun&! overhead. For pricing purposes, it should e(amine onl" the marginal addition to pension liabilit" that a project will cause, and allocate onl" this cost to the project. 8. %tarshine .roducts is considering the launch of a new line of dolls that would use an assembl line that currentl has some spare capacit . %ome %tarshine executives argued that because the assembl line was alread paid for, its cost was sunk and should not be included in the project evaluation. <thers argued that the assembl line was a scarce resource and should be priced accordingl . What cost should %tarshine assign to use of the excess assembl line capacit ?

Chapter 3: Estimating Project Cash Flows Answer: The cost associated with the additional use of the line due to the new project should be allocated to the new project. This includes, but is not limited to, the additional costs of power, labor, maintenance and repair, changes in e(pected replacement costs incurred earlier b" additional use, and an" opportunit" costs of the line usage. For e(ample, are there other potential future uses of the spare capacit", e.g. sales growth of the current product line> The answer depends upon the alternative uses of the assembl" line. 9. 0n order to produce its new line of canned foods, ,ammond $oods must purchase a speciali;ed piece of e#uipment that has the capacit to fill a million cans annuall . %uppose ,ammond plans to initiall produce '+(,((( cans annuall . %ome executives argued that the new product line should be charged for onl '+ percent of the cost of the new e#uipment. <thers argued that it should bear the full cost of the special-purpose machiner . Who is right? >xplain. Answer: %t would be appropriate to charge the full cost of eBuipment against the projectAs benefits provided there is no other user. Clearl", the machine the remaining 9J4! would not be purchased in the absence of this production decision$ it represents a trul" incremental cash flow. ?lso, to the e(tent that the e(tra capacit" gives the compan" an option to cheapl" e(pand production, the option value should also be included in the purchase0production decision. 10. ,app Tub makes traditional cast- iron bathtubs. ,owever, the compan was thinking of adopting a novel proprietar casting process to make lighter bathtubs that could compete better against plastic ones which were eating into sales, while also reducing raw materials costs. The &*+ million investment seemed wise from a marketing perspective, but its -./ came to - &? million. What other factors should ou consider in light of the following assumptions that entered into this figure? a.The base case implicitl assumed that sales would sta the same without the new investment. b.,app Tub has two plants, both running below capacit . %ince just one plant would be upgraded, however, onl products made at that plant would benefit from the new efficiencies. Thus, the finance director used a high discount rate to reflect the highl uncertain volumes and costs savings from using the new process. c. ,app Tub used a standard ten- ear life to evaluate the new project. %ince ten ears was also the standard life over which plant and machiner were depreciated, the finance director inserted a ;ero terminal value for the upgraded plant. d.,app Tub ignored the other opportunities that the introduction of the proprietar casting process might create since these opportunities were purel speculative. e. Although the proprietar casting process promised #ualit improvements, the investment anal sis assumed that an sales of the new bathtub would just replace sales of ,app Tub"s cast iron tubs. The anal sis considered the cost savings from reduced raw materials usage to

Chapter 3: Estimating Project Cash Flows be the onl source of project gains. Answer:

1. Tel5o must decide whether to replace a computer s stem with a new model. Tel5o forecasts net before- tax cost savings from the new computer over five ears as given below 9in &(((:. 0t has a '* percent cost of capital, a ?+ percent tax rate, and uses straight- line depreciation. Iear -! . 3J1 : 3J1 3 K J 311

311 311

a. The new computer costs &' million but Tel5o is eligible for a '+ percent investment tax credit 90T5: in the first ear. The 0T5 reduces Telco"s taxes b an amount e#ual to '+ percent of the e#uipment"s purchase price. 0n addition, the old computer can be sold for &=+(,(((. 0f the old computer originall cost &'.*+ million and is three ears old 9depreciable, not economic, life is five ears:, what is the net investment re#uired in the new s stem? Assume that there was no 0T5 on the old computer and that both computers are being depreciated to a ;ero salvage value. Answer: ?ll figures are in thousands. The net investment in the machine can be found b" the following eBuation: Net Inv = Cost - Salv(Old) + Tax from sale of Old = 1000 - 4 0 - 0!" ( 0) = # "$! 0! The boo& value of the old machine was -J11, but it can be sold for -KJ1, at a -J1 loss. The writeoff is worth 1.3J J1! 2 -.E.J1 to the compan". This reduces the effective investment in the new machine. b. >stimate the incremental operating cash flows associated with the new s stem. Answer: The incremental cash flows can be found b" calculating: %ncr Cash Flow 2 ?fter Ta( =avings 6 t L 5et 8epreciation! c. 0f the new computer"s salvage value at the end of five ears is projected to be &'((,(((, should Tel5o purchase it? Answer: %f the computer has a salvage value after J "ears, and is sold at that time, the boo& value will be Cero, and the compan" will have to pa" a ta( of 1.3J L .11 2 -3J at that time. This changes the marginal cash flow to :GJ 6 .11 ' 3J 2 -331 in "ear J. The present value of the marginal cash flows at .:4! is -933..3. The net present value is 933..3 ' J3:.J1 2 -3GG.E1. The new computer should be purchased.

Chapter 3: Estimating Project Cash Flows 2. -ew diesel locomotives will cost a railroad &@((,((( each and can be depreciated straightline over their five- ear life. Asing a diesel instead of a coal-fired steam locomotive will save &'*,((( annuall in operating expenses. Bailroads have a re#uired rate of return of '( percent and a tax rate of =( percent. a! *hat is the ma(imum price a railroad would be willing to pa" for a coal'fired steam locomotive> #int: =et up the cash flows for a coal'fired locomotive at a price of P, including depreciation, and then compare them to the incremental cash flows associated with a diesel costing -G11,111.! Answer: P7%F?r2.14,n2J 2 3.E31E9E. Consider the decision to switch from coal'fired steam locomotives to diesel locomotives. *e will find the indifference point b" assuming that the net present value of the switching decision is Cero. ?ll figures are reported in thousands. The incremental cost is G11 @ P!. ?nnual incremental cash flows 2 .@t! =avings! 6 t %ncr 8epr!. 2 1.G .:! 6 1.K .:1 @ 1.:P! 2 JJ.: @ 1.19P. The present value of the incremental cash flows is P7%F?M JJ.: @ 1.19P! or :13.:J.KK: @ 1.313:G3P. =etting this e(pression eBual to G11 @ P, we solve for P 2 -JG1.9:G. This ma&es 5P7 2 1. b. Will our answer to 9a: change if the railroad has enormous tax-loss carr forwards that put it in a ;ero taxpa ing position for the foreseeable future? Answer: Enormous ta( loss carr"forwards ma&e the effective ta( rate eBual to Cero. Therefore, the annual incremental cash flow is -.:&, and its present value is .: M 3.E31E9E 2 KJ.K93K. =etting this eBual to the marginal cost of G11 @ P!, we get P 2 -JJK,J... The value of the cost savings obtained b" the purchase of diesel locomotives is higher, since the savings are not ta(ed. This ma&es the diesel relativel" more valuable in this instance. 3. /arico produces ,<- scale trains, including a diesel locomotive that sells '((,((( units annuall . >ach unit re#uires an electric motor. .resentl these are purchased once a week from a local manufacturer for &'( apiece. ,owever, a foreign firm has offered to sell /arico a container of '((,((( motors of like #ualit for onl &).+( apiece. Civen an interest rate of '+ percent, what should /arico do? Answer: ;" bu"ing .11,111 motors toda", the firm will have average inventor" on hand of J1,111 during the "ear. The opportunit" cost of maintaining this inventor" eBuals ?verage 5umber of Nnits on #and J1,111 Price Per Nnit -3.J1 %nterest Fate 1..J 2 -.,:J1

( (

( (

;" bu"ing wee&l", the firm incurs no interest e(pense. Thus, the real cost of bu"ing .11,111

Chapter 3: Estimating Project Cash Flows motors toda" is -3J1,111 6 -E.,:J1 2 -.,1:.,:J1. This e(ceeds the -./ that it costs to bu" motors at -.1 apiece on a wee&l" basis. 4. To capitali;e on consumers" concerns about healthful food, %pecific $oods, 0nc., is considering a new cereal, /eggie 5risp, which contains small bits of cooked vegetables with bran flakes. As part of its cash flow anal sis, the finance department has made the following forecasts of demand and costD a. %ales revenue for the first ear will be &*((,((( and increase to &',(((,((( the next ear. Bevenue will then grow b '+ percent a ear for the next four ears, remain the same in the seventh ear, and then decline b '+ percent a ear for the next three ears, when the product will be terminated. b. 5ost of goods sold will be @( percent of sales. c. Advertising and general expenses will be &'(,((( a ear. d. >#uipment will be purchased toda for &',*+(,((( and will be depreciated over the tenear project using the straight-line method. 0nstallation cost toda is &*+,(((, and this is depreciated over five ears, also on a straight-line basis. The e#uipment has no salvage value. <ther initial costs 9which are expensed, not depreciated: total &1E+,(((. There is no investment tax credit. 9i:. 5alculate net income and operating cash flow using a ?+ percent tax rate. Answer: The income and cash flow statement -111As! appears below rounded mercilessl": Total P7 is accurate to decimal places shown! %ear Sales C*S Adv+*en ,e-r (./01-) ,e-r(Inst) OC2 34(r=105) Ta( rate 2 3J4 1 :11 .:1 .1 .:J J 3. 93 $ .111 G11 .1 .:J J :33 :KE " ..J1 G31 .1 .:J J 339 :JK 4 .3:3 .J:. E3K 3.3 .1 .1 .:J .:J J J 393 K3K :G. :E1 & .EK3 .1K3 .1 .:J 1 K3: :E9 ' ( ) .EK3 .K9E .:GK .1K3 93: EJ9 .1 .1 .1 .:J .:J .:J 1 1 1 K3: K:K 3GG :J: .39 .JJ 10 .1EK GKK .1 .:J 1 3.E .::

Total P7 2


b. $ind the net present value of the project using a '( percent cost of capital. Answer: Cost toda" 2 .:J1 6 :J 6 9EJ . @ 1.3J! 2 -.9K3.EJ1. 5P7 -111As! 2 :.:1.1GJ @ .9K3.EJ1 2 -:EG.3.J. The project should be accepted. c. 0n an effort to adjust for inflation, the finance department has produced an alternative estimate of cash flows. The product price will remain the same, but advertising and general expenses will grow b + percent a ear from its initial level of &'(,(((. 0n addition, the cost of goods sold will grow b *( percent a ear from its initial level of &@((,((( until ear @, remain the same in ear E, and then decline b '+ percent a ear through ear '(. What is

Chapter 3: Estimating Project Cash Flows the project"s net present value under these assumptions? Answer: Nnder the new cash flow estimates, the project should be rejected: Iear =ales CO= 8epr EBuip! 8epr %nst! <CF
PV(r=10%) Year 1 2 3 4 5 6 7 8 9 10 Sales 200 1000 1150 1323 1521 1749 1749 1487 1264 1074 CGS 120 600 720 864 10371244 1244 1058 899 764 !"#Ge$ 10 11 11 12 12 13 13 14 15 16 %e&r('()*&) 125 125 125 125 125 125 125 125 125 125 %e&r(+$s,) 5 5 5 5 5 0 0 0 0 0 -C. 91 299 318 336 352 364 363 314 271 235 PV(r=10%) 83 247 239 229 219 205 186 146 115 91 /01 2a3 ra,e = 35% 24,al PV = 517606160

200 120 10

1000 600 11

1150 720 11

1323 864 12

1521 1037 12

1749 1244 13

1749 1244 13

1487 1058 14

1264 899 15

1074 764 16

5P7 -111As! 2 .EG1..G1 @ .9K3.EJ1 2 @-93.J31. J. %n building a new facilit" for producing truc&s, %nternational Truc& %T! must estimate the total investment reBuired. %n the current "ear, %T estimates it will acBuire land for the plant at -.,111,111 and modif" e(isting plant eBuipment for -.:3,111. 5e(t "ear, construction will begin and reBuire -9GG,111, and further plant modifications will reBuire -3KK,111. %n addition, new eBuipment worth -.K1,111 will be purchased with a .1 percent investment ta( credit!. The new eBuipment will reBuire -:J1,111 of installation e(pense. Finall", in the ne(t "ear, construction will be completed at a cost of -EJ1,111$ installation charges will total -::3,111$ and building modifications will reBuire -3J1,111. Pastl", more new eBuipment will be purchased for -:31,111 with a .1 percent %TC!. *ith a cost of capital of .1 percent, what is the present value of the initial investment reBuired for the plant>

Year 0 1 7a$! 180008000 94!*:*;a,*4$ 1238000 C4$s,r);,*4$ 94!*:*;a,*4$ <e= '()*&>e$, +$s,alla,*4$ 2 8668000 7508000 3448000 3508000 1268000? 2078000? 2508000 2298000

Chapter 3: Estimating Project Cash Flows

24,als PV (10%) 24,al PV 181238000 181238000 5388348239 185868000 184418818 185368000 182698421

L5et of investment ta( credit G. Ian&ee ?tomic Electric Co. announced in .33: that it would decommission its Ian&ee Fowe nuclear plant at an estimated cost of -:KE million. The cost includes:
*6 532 >*ll*4$ ,4 >a*$,a*$ ,@e &la$, )$,*l 20008 =@e$ !*s>a$,l*$A =*ll BeA*$6 2@ese e3&e$ses =*ll a;;r)e a, ,@e ra,e 4: 54 >*ll*4$ a Cear6 **6 55665 >*ll*4$ :4r ,@e ;4s, 4: B)*l!*$A a :a;*l*,C ,4 s,4re *,s s&e$, :)el )$,*l *, *s s@*&&e! *$ 2000 ,4 a &er>a$e$, re&4s*,4rC6 2@*s s,4raAe :a;*l*,C =*ll Be !e&re;*a,e! s,ra*A@,Dl*$e 4"er *,s e*A@,DCear es,*>a,e! l*:e6 ***6 515865 >*ll*4$ :4r ,@e ;4s, 4: !*s>a$,l*$A ,@e &la$, *$ 2000 a$! !*s&4s*$A 4: *,s $);lear =as,es6

?t the same time, Ian&ee ?tomic estimated that decommissioning the plant in .33:, eight "ears earlier than its planned retirement in :111, will save it -..G million -.K.J million a "ear! before ta( b" enabling the utilit" to purchase cheaper electricit" than Ian&ee Fowe could provide. %n addition, Ian&ee ?tomic said it had accumulated -E: million in a decommissioning fund reBuired b" the 5uclear Fegulator" Commission. a. *hat is the present value of Ian&eeAs -:KE million decommissioning cost. ?ssume a cost of capital eBual to .: percent and a 3K percent ta( rate. Answer: . %n order to answer this Buestion we must ma&e some assumptions regarding the timing of the various cash flows. ?ssume that the maintenance and storage facilit" costs begin immediatel" in .33:. The costs associated with the storage facilit" include an initial outla" of -JG.J million and subseBuent depreciation ta( shields worth -:,KE.,9EJ annuall" 1.3J > -JG,J11,11109! beginning in .333 and continuing through :111. ?ll cash flows are assumed to occur at the beginning of the "ear, that is, the .33: cash flows are e(pected to occur immediatel" and so on. ?s shown in the bottom row of this table, the present value of these net costs discounted at .:4 is -.G1 million. Iear
1992 1993 1994 1995 1996 1997 1998 1999 2000

/aintenance =torage Facilit"

480008000 480008000 480008000 480008000 480008000 480008000 480008000 480008000

8ismantling08isposal Costs

Total Cash Flows

5685008000 5685008000 (284718875) 185288125 (284718875) 185288125 (284718875) 185288125 (284718875) 185288125 (284718875) 185288125 (284718875) 185288125 (284718875) 185288125 (284718875) 15885008000 16080288125 Prese$, "al)e E 12% 512881068666 B6 2aF*$A *$,4 a;;4)$, ,@e sa"*$As 4$ ,@e &)r;@ase 4: ;@ea&er ele;,r*;*,C8 a$! ,@e 572 >*ll*4$ alrea!C se, as*!e8 @4= >);@ a!!*,*4$al >4$eC !4es Ya$Fee ,4>*; @a"e ,4 se, as*!e *$ 1992 ,4 @a"e e$4)A@ >4$eC ,4 &aC :4r ,@e !e;4>>*ss*4$*$A e3&e$seG

Answer: The following table ta&es into account the savings on the purchase of cheaper electricit". 5ot that the annual after'ta( fuel savings of -3,:KJ,111 -.K.J million net of ta( at 3J4, or -.K,J11,111 > 1.GJ! show up with a negative sign because it is a cost reduction. The net present

Chapter 3: Estimating Project Cash Flows value of these costs as shown on the bottom line is -9..3 million. Ian&ee ?tomic has to set aside an additional -3.3 million in .33: to ma&e up the shortfall -9..3 million ' -E: million!.
Year 9a*$,e$a$;e 24,al Cas@ .l4=s 1992 1993 480008000 1994 480008000 1995 480008000 1996 480008000 1997 480008000 1998 480008000 1999 480008000 2000 480008000 S,4raAe .a;*l*,C %*s>a$,l*$A#%*s&4sal C4s,s :,erD,a3 .)el Sa"*$As 5685008000 (788968875) (788968875) (788968875) (788968875) (788968875) (788968875) (788968875) 15086038125

5685008000 (284718875) (284718875) (284718875) (284718875) (284718875) (284718875) (284718875) (284718875) 15885008000 Prese$, "al)e E 12%

(984258000) (984258000) (984258000) (984258000) (984258000) (984258000) (984258000) (984258000) 58182868661


*hat other factors might "ou consider in calculating the cost of decommissioniong>

Answer: Oiven the ever'stiffening environmental laws, it would ma&e sense to ta&e into account the li&elihood that cleanup standardsQand hence costsQwill rise over time. ?t the same time, it would ma&e sense to tr" to loc& politicians into the decommissioning program so that it would be grandfathered in the event of tougher laws.
76 -l!@a> +$!)s,r*es *s ;4$s*!er*$A re&la;*$A a 5DCear 4l! >a;@*$e =*,@ a$ 4r*A*$al l*:e 4: 10 Cears8 a ;4s, 4: 510080008 a$! a Her4 sal"aAe "al)e8 =*,@ a $e= a$! >4re e::*;*e$, >a;@*$e6 2@e $e= >a;@*$e =*ll ;4s, 52008000 *$s,alle! a$! =*ll @a"e a 10DCear l*:e6 2@e $e= >a;@*$e =*ll *$;rease sales BC 5258000 a$! !e;rease s;ra& ;4s, BC 5108000 &er Cear6 2@e 4l! >a;@*$e ;a$ Be s4l! ;)rre$,lC a, 55080008 a$! -l!@a>Is >arA*$al ,a3 ra,e *s 50 &er;e$,6 ss)>e s,ra*A@,Dl*$e !e&re;*a,*4$ a$! a 10 &er;e$, *$"es,>e$, ,a3 ;re!*, :4r B4,@ ,@e 4l! a$! ,@e $e= >a;@*$es6 &r4ra,e! &4r,*4$ 4: a$C *$"es,>e$, ,a3 ;re!*, >)s, Be re,)r$e! ,4 ,@e +JS :4r e()*&>e$, s4l! Be:4re ,@e e$! 4: *,s !e&re;*aBle l*:eK ,@a, *s8 *: @al: ,@e e()*&>e$,Is l*:e re>a*$s8 ,@e$ @al: ,@e +2C *s re;la*>e! BC ,@e +JS6 ss)>e !e&re;*a,*4$ *s ,aFe$ 4$ 100 &er;e$, 4: ,@e ;4s, 4: e()*&>e$,6 a6 L@a, *s ,@e *$*,*al ;as@ 4),:l4= Ae$era,e! BC ,@e >a;@*$e re&la;e>e$,G

b. *hat are the annual operating cash flows generated b" this project> Answer: c. *hat is the net present value of this replacement project, given a .: percent cost of capital> Answer:
86 94le;)Ae$ @as !e"el4&e! a $e= F*$! 4: ;ar!*a; !*aA$4s,*; )$*,6 -=*$A ,4 ,@e @*A@lC ;4>&e,*,*"e $a,)re 4: ,@e >arFe,8 ,@e sales !e&ar,>e$, :4re;as,s !e>a$! 4: 58000 )$*,s *$ ,@e :*rs, Cear a$! a !e;rease *$ !e>a$! 4: 10 &er;e$, a Cear a:,er ,@a,6 :,er :*"e Cears8 ,@e &r4Me;, =*ll Be !*s;4$,*$)e! =*,@ $4 sal"aAe "al)e6 2@e >arFe,*$A !e&ar,>e$, :4re;as,s a sales &r*;e 4: 515 a )$*,6 Pr4!);,*4$ es,*>a,es 4&era,*$A ;4s, 4: 55 a )$*,8 a$! ,@e :*$a$;e !e&ar,>e$, es,*>a,es Ae$eral a$! a!>*$*s,ra,*"e e3&e$ses 4: 5158000 a Cear6 2@e *$*,*al *$"es,>e$, *$ la$! *s 51080008 a$! 4,@er $4$!e&re;*aBle se,)& ;4s,s are 51080006 a6 +s ,@e $e= &r4Me;, a;;e&,aBle a, a ;4s, 4: ;a&*,al 4: 10 &er;e$,G (<4,eN Ose s,ra*A@,Dl*$e

Chapter 3: Estimating Project Cash Flows

!e&re;*a,*4$ 4"er ,@e l*:e 4: ,@e &r4Me;, a$! a ,a3 ra,e 4: 35 &er;e$,6) Answer: %e>a$! Gr4=,@ 10% Pr*;e Gr4=,@ 0% Year 1 2 3 4 5 %e>a$! 5000 4500 4050 3645 3281 Sales Pr*;e 15600 15600 15600 15600 15600 Je"e$)e 758000 678500 608750 548675 498208 C4s,s 258000 228500 208250 188225 168403 '3&e$ses 158000 158000 158000 158000 158000 <-+ 228750 198500 168575 138943 118573 /01 24,al PV = 658960 <PV = 458960 ( ;;e&,aBle) B6 +: ,@e >arFe,*$A !e&ar,>e$, @a! :4re;as, a !e;l*$e 4: 15 &er;e$, a Cear *$ !e>a$!8 =4)l! ,@e &r4Me;, Be a;;e&,aBleG Answer: %e>a$! Gr4=,@ 15% Year 1 2 3 4 5 %e>a$! 5000 4250 3613 3071 2610 Je"e$)e 758000 638750 548188 468059 398150 C4s,s 258000 218250 188063 158353 138050 <-+ 228750 178875 138731 108209 78215 /01 24,al PV = 578224 <PV = 378224 ( ;;e&,aBle) ;6 +: ,@e >arFe,*$A !e&ar,>e$, @a! :4re;as, a !e;l*$e *$ sales &r*;e 4: 10 &er;e$, a Cear8 al4$A =*,@ ,@e 15 &er;e$, a$$)al !e;l*$e *$ !e>a$! &re!*;,e! *$ (B)8 =4)l! ,@e &r4Me;, Be a;;e&,aBleG Answer: 6 %e>a$! Gr4=,@ 15% Pr*;e Gr4=,@ 10% Year 1 2 3 4 5 %e>a$! 5000 4250 3613 3071 2610 Sales Pr*;e 15600 13650 12615 10694 9684 Je"e$)e 758000 578375 438892 338577 258687 C4s,s 258000 218250 188063 158353 138050 '3&e$ses 158000 158000 158000 158000 158000 <-+ 228750 138731 78039 28096 18536 /0 1 24,al PV = 378796 <PV = 178796 ( ;;e&,aBle) !6 +: &r*;es !e;l*$e BC 10 &er;e$, a Cear8 ,@e >arFe,*$A !e&ar,>e$, es,*>a,es ,@a, !e>a$! =*ll Be a ;4$s,a$, 58000 )$*,s a Cear6 +s ,@e &r4Me;, a;;e&,aBleG

8emand Orowth 14 Price Orowth @.14
Year 1 2 3 4 5 %e>a$! 5000 5000 5000 5000 5000 Sales Pr*;e 15600 13650 12615 10694 9684 Je"e$)e 758000 678500 608750 548675 498208 C4s,s 258000 258000 258000 258000 258000

Chapter 3: Estimating Project Cash Flows

'3&e$ses 158000 158000 158000 158000 158000 <-+ 228750 178875 138488 98539 58985 /0 1 24,al PV = 558819 <PV = 358819 ( ;;e&,aBle) 96 Sal,erell 2e3,*les *s ;4$s*!er*$A re&la;*$A ,@e l44>*$A e()*&>e$, *$ *,s <4r,@ Car4l*$a >*ll6 2@e 4r*A*$al &)r;@ase &r*;e =as 5798300 ,=4 Cears aA46 2@e >a;@*$e @as a )se:)l l*:e 4: ,e$ Cears a$! *s Be*$A !e&re;*a,e! )s*$A ,@e s,ra*A@,Dl*$e >e,@4!6 2@e 4l! e()*&>e$, ;a$ Be s4l! ,4!aC :4r 51088006 2@e $e= e()*&>e$, ;4s,s 5808500 a$! @as a$ e*A@,DCear l*:e6 +,s sal"aAe "al)e *s e3&e;,e! ,4 Be 5880006 2@e $e= e()*&>e$, *s e3&e;,e! ,4 *$;rease 4),&), a$! sales re"e$)e BC 598000 a Cear (a:,er ,a3) a$! re!);e ;4s,s BC 578500 (a:,er ,a3)6 a6 L*,@ a ,a3 ra,e 4: 25 &er;e$, a$! a 14 &er;e$, ;4s, 4: ;a&*,al8 =@a, s@4)l! Sal,erellIs !e;*s*4$ BeG

Answer: 5P7 2 P7 Fevenue R =avings! 6 5P7 5ew /achine! 6 5P7 <ld! 5P7 Fevenue R =avings! 2 3111 6 EJ11! M P7%Fr2.K4,n29 2 .G,J11 M K.G393 2 -EG,JK..:J. after ta(! 5P7 5ew /achine! 2 @Cost 6 P7 8epr! 6 P7 ?fter ta( salvage! 2 @91,J11 6 1.:J M .1,1G:.J1 M K.G393 6 9111 1.EJ! 1.3J1G 2 P7%F! 2 @-GG,E:G.GE. 5P7 <ld /achine! 2 S?fter Ta( =ales ProceedsT @ P7 8epr! 2 S.1,911 @ 1.:J .1,911 @ G3,KK1L!T @ E331 M 1.:J M K.G393 2 -.K,EG3.KJ. <verall 5P7 2 -EG,JK..:J @ G:,931.:E 6 .K,EG3.KJ 2 -:K,JE9. b. *ould a .1 percent %TC change the anal"sis> Answer: ? .14 %nvestment Ta( Credit would reduce current ta(es b" 1..1 91,J11! 2 -91J1. The effective 5P7 of the 5ew /achine is increased to @J9,GEG.GE, and the overall 5P7 is increased to -3:,G:9. c. %f an inflation rate of E percent a "ear must be incorporated into the decision, is the project acceptable> Answer: ?n inflation rate of E4 will increase nominal revenues, costs and salvage values, but will not affect depreciation or after'ta( value of the sale of an e(isting asset assuming the E4 inflation rate was alread" included in the nominal discount rate!. ?s such, the inclusion of inflation will onl" ma&e the net present value picture rosier.
106 J4ss %es*A$s *s ,@*$F*$A 4: re&la;*$A *,s se"e$DCearD4l! F$*,,*$A >a;@*$e =*,@ a $e= 4$e ,@a, ;a$ als4 e>B4ss !es*A$s 4$ ;l4,@6 2@*s =*ll all4= J4ss ,4 sell *,s ,e3,*les8 =@*;@ ;)rre$,lC =@4lesale :4r 51620 a Car!8 :4r 50607 a Car! >4re6 2@e e>B4ss*$A s@4)l! als4 ra*se sales 15 &er;e$,8 ,4 2607 >*ll*4$ Car!s a$$)allC6 2@e $e= >a;@*$e ;4s,s 532080008 @as a$$)al 4&era,*$A ;4s,s 4: 52780008 a$! *s e3&e;,e! ,4 las, :4r e*A@, Cears6 7aB4r8 >a,er*als8 a$! 4,@er e3&e$ses are es,*>a,e! ,4 r*se BC 506028 ,4 51610 &er Car!6 L4rF*$A ;a&*,al re()*re>e$,s s@4)l! re>a*$ a, 30 &er;e$, 4: sales6 ll =4rF*$A ;a&*,al *$"es,>e$,s =*ll Be re;a&,)re! *$ e*A@, Cears6 2@e ;)rre$, >a;@*$e =as &)r;@ase! :4r 51908000 a$! *s Be*$A !e&re;*a,e! 4$ a s,ra*A@,Dl*$e Bas*s ass)>*$A a 10DCear l*:e6 +,s e;4$4>*; l*:e as 4: ,4!aC8 @4=e"er8 *s es,*>a,e! ,4 Be e*A@, Cears8 ,@e sa>e as ,@a, 4: ,@e $e= >a;@*$e6 +, ;a$ Be s4l! :4r 5708000 ,4!aC8 4r :4r a$ es,*>a,e! sal"aAe "al)e 4: 558000 *$ e*A@, Cears6 2@e $e= >a;@*$e =*ll Be !e&re;*a,e! s,ra*A@, l*$e 4"er a :*"eDCear &er*4!8 a$! @as a$ es,*>a,e! sal"aAe "al)e 4: 5208000 *$ e*A@, Cears6 2@e a&&r4&r*a,e !*s;4)$, ra,e *s es,*>a,e! a, 12 &er;e$,6 a6 L@a, *s ,@e ;@a$Ae *$ 4&era,*$A ;as@ :l4=s :4r ea;@ CearG L@a, *s ,@e*r &rese$, "al)eG

Chapter 3: Estimating Project Cash Flows Answer: #ere are the incremental cash flows associated with the new machine. The present value of these cash flows, discounted at .:4, is -K.G,K13. ?lthough it is not mentioned in the problem, the ta( rate is assumed to be 3J4. 5ote that the incremental depreciation varies from "ear to "ear, depending on the old and new depreciation schedules.
Year 1 2 3 4 5 6 7 8 286288900 286288900 286288900 286288900 286288900 286288900 286288900 286288900 -l! sales re"e$)e 281608000 281608000 281608000 281608000 281608000 281608000 281608000 281608000 +$;re>e$,al sales re"e$)e 4688900 4688900 4688900 4688900 4688900 4688900 4688900 4688900 $$)al >a;@*$e 4&era,*$A ;4s,s 278000 278000 278000 278000 278000 278000 278000 278000 -,@er ;4s,s ($e=) 282778000 282778000 282778000 282778000 282778000 282778000 282778000 282778000 -,@er ;4s,s (4l!) 189448000 189448000 189448000 189448000 189448000 189448000 189448000 189448000 +$;re>e$,al 4,@er ;4s,s 3338000 3338000 3338000 3338000 3338000 3338000 3338000 3338000 %e&re;*a,*4$ ($e=) 648000 648000 648000 648000 648000 %e&re;*a,*4$ (4l!) 198000 198000 198000 +$;re>e$,al !e&re;*a,*4$ 458000 458000 458000 648000 648000 +$;re>e$,al Be:4reD,a3 &r4:*, 638900 638900 638900 448900 448900 1088900 1088900 1088900 +$;re>e$,al ,a3 E 35% 228365 228365 228365 158715 158715 388115 388115 388115 +$;re>e$,al a:,erD,a3 &r4:*, 418535 418535 418535 298185 298185 708785 708785 708785 +$;re>e$,al !e&re;*a,*4$ 458000 458000 458000 648000 648000 +$;re>e$,al 4&era,*$A ;as@ :l4= 868535 868535 868535 938185 938185 708785 708785 708785 Prese$, "al)e E12% 778263 688985 618594 598221 528876 358862 328020 288589 C)>)la,*"e &rese$, "al)e 5778263 51468249 52078842 52678063 53198939 53558801 53878820 54168409 B6 L@a, are ,@e $e, ;as@ :l4=s ass4;*a,e! =*,@ ,@e &)r;@ase 4: ,@e $e= F$*,,*$A >a;@*$e a$! sale 4: ,@e 4l! 4$eG Answer: +: J4ss &)r;@ases ,@e $e= >a;@*$e8 *, =*ll @a"e a$ *$*,*al 4),laC 4:53208000 a$! ;as@ re;e*&,s 4: 5708000 :r4> ,@e sale 4: ,@e 4l! >a;@*$e6 :,er se"e$ Cears 4: s,ra*A@,Dl*$e !e&re;*a,*4$8 ,@e 4l! >a;@*$e =*ll @a"e a B44F "al)e 4: 55780006 Pe$;e8 J4ss =*ll @a"e ,4 &aC ,a3 4: 548550 4$ ,@e re;a&,)re 4: 5138000 *$ e3;ess !e&re;*a,*4$ (5138000 3 0635)6 2@)s8 J4ssIs $e, ;as@ 4),laC =*ll Be 52548550 (53208000 D 708000 Q 48550)6 , ,@e e$! 4: e*A@, Cears8 J4ss =*ll sell *,s $e= >a;@*$e :4r a$ es,*>a,e! 52080006 P4=e"er8 s*$;e ,@e B44F "al)e =*ll Be 08 J4ss =*ll @a"e ,4 &aC ,a3 4: 578000 (5208000 3 0635) 4$ ,@e re;a&,)re! !e&re;*a,*4$6 2@*s lea"es J4ss =*,@ a $e, ;as@ *$:l4= 4: 5138000 *$ e*A@, Cears6 2@ere *s 4$e >4re *>&a;, 4: ,@e &)r;@ase 4: ,@e $e= >a;@*$eN J4ss l4ses ,@e es,*>a,e! 558000 sal"aAe "al)e 4: ,@e 4l! >a;@*$e a, ,@e e$! 4: Cear 86

Chapter 3: Estimating Project Cash Flows

, ,@e sa>e ,*>e8 J4ss a"4*!s &aC*$A ,a3 4: 518750 4$ ,@e re;a&,)re! !e&re;*a,*4$8 lea"*$A *, =*,@ a $e, l4ss 4: 5382506 Pe$;e8 ,@e $e, e::e;, 4: ,@e &)r;@ase 4: ,@e $e= >a;@*$e a$! sale 4: ,@e 4l! 4$e 4$ Cear 8 ;as@ :l4=s *s a $e, *$;rease *$ ;as@ :l4= :4r ,@a, Cear 4: 598750 (5138000 D 538250)6 2@e &)r;@ase 4: ,@e $e= >a;@*$e als4 a::e;,s *$,er>e!*a,eD,er> ;as@ :l4=s ,@r4)A@ *,s e::e;,s 4$ !e&re;*a,*4$6 P4=e"er8 ,@ese e::e;,s @a"e alrea!C Bee$ *$;4r&4ra,e! *$,4 ,@e 4&era,*$A ;as@ :l4= a$alCs*s6 2@e &rese$, "al)e 4: J4ssIs *$"es,>e$, *$ ,@e $e= >a;@*$e *s 52508612 (52548550 D 598750#16128) ;6 L@a, *s ,@e <PV 4: ,@e *$"es,>e$, *$ =4rF*$A ;a&*,alG

Answer: The incremental wor&ing capital reBuirement is 314 of incremental sales, or -.K1,GE1 -KG9,311 ( 1.31!. Foss will recapture this investment at the end of "ear 9. #ence, the net present value of its incremental wor&ing capital investment is -93,9JG -.K1,GE1 ' -.K1,GE10...:9!. d. *hat is the 5P7 of the acBuisition of the new &nitting machine> =hould Foss bu" it> Answer: Combining the answers to parts a!' c! "ields an 5P7 for the new &nitting machine of -9.,3K. -K.G,K13 ' -:J1,G.: ' -93,9JG!. e. =uppose that all prices and costs are in nominal terms and will increase at the rate of inflation, which is projected at K percent. #ow does the anal"sis in parts a! through d! change> The .: percent discount rate is e(pressed in nominal terms as well. Answer: ?ssuming growth in costs and sales of K4 annuall" "ields a new present value of operating profits eBual to -KG1,J.K, as shown below, an increase of -KK,.1J compared its value before.
Year 1 2 3 4 5 6 7 8 <e= sales re"e$)e 286288900 287348056 288438418 289578155 380758441 381988459 383268397 384598453 -l! sales re"e$)e 281608000 282468400 283368256 284298706 285268894 286278970 287338089 288428413 +$;re>e$,al sales re"e$)e 4688900 4878656 5078162 5278449 5488547 5708489 5938308 6178040 $$)al >a;@*$e 4&era,*$A ;4s,s 278000 288080 298203 308371 318586 328850 348164 358530 -,@er ;4s,s ($e=) 282778000 283688080 284628803 285618315 286638768 287708319 288818131 289968377 -,@er ;4s,s (4l!) 189448000 280218760 281028630 281868736 282748205 283658173 284598780 285588171 +$;re>e$,al 4,@er ;4s,s 3338000 3468320 3608173 3748580 3898563 4058145 4218351 4388205 %e&re;*a,*4$ ($e=) 648000 648000 648000 648000 648000 %e&re;*a,*4$ (4l!) 198000 198000 +$;re>e$,al !e&re;*a,*4$ 458000 458000 +$;re>e$,al Be:4reD,a3 &r4:*, 638900 688256 1328494 1378793 1438305 +$;re>e$,al ,a3 E 35% 228365 238890 468373 488228 508157 +$;re>e$,al a:,erD,a3 &r4:*, 418535 448366 868121 898566 938148 +$;re>e$,al !e&re;*a,*4$ 458000 458000 198000 458000 728786 258475 478311 458000 648000 588498 208474 388023 648000 648000 638398 228189 418208 648000

Chapter 3: Estimating Project Cash Flows

+$;re>e$,al 4&era,*$A ;as@ :l4=868535 898366 868121 898566 938148 Prese$, "al)e E12% 778263 718242 438631 408515 378621 C)>)la,*"e &rese$, "al)e 5778263 51488506 53388747 53828378 54228893 54608514 928311 658705 52148211 1028023 648838 1058208 598698 52798049

?t the same time, wor&ing capital reBuirements rise "ear b" "ear at the rate of K4 annuall". The present value of these increases net of their return at the end of "ear 9 is -3K,3EK, as shown below. This figure is -.1,J.9 more than its value of -93,9JG under the no'inflation scenario.
Year 0 1 2 3 4 5 6 7 8 +$;re>e$,al =4rF*$A ;a&*,al re( 1408670 58627 58852 68086 68329 68583 68846 78120 (1858112) Prese$, "al)e E12% 51408670 558024 548665 548332 548022 538735 538468 538221 D5748764 C)>)la,*"e &rese$, "al)e 51408670 51458694 51508359 51548691 51588713 51628448 51658917 51698137 5948374 2@e $e, e::e;, 4: ,@ese ;@a$Aes *s ,4 *$;rease ,@e &r4Me;, <PV BC 5338587 (5448105 D 5108518)6