Electro Pump Company, Inc.

Ahmad Ali Page 1/5

2020-04-0012
New Equipment Cost Details Recovery from replacement of Old System EMBA
Cost of New System $ (158,000) Sale Price $ 20,000
Installation and Testing Charges $ (5,000) Installation Charges $ (1,000)
Total Cost of Equipment $ (163,000) $ 19,000
Book Value $ 6,000
Profit from sale $ 13,000
Old System Recovery & Removal Tax $ (5,200)
Sale Price before Tax $ 20,000
Removal Charges $ (1,000)
$ 19,000
Current Book Value of the Equipment $ 6,000
Gain in sale of Equipment $ 13,000

Tax @ 40% $ (5,200)

Timeline
Description 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Cost of New Equipment $ (163,000)
Sale of Old System Excluding Tax $ 13,800
Depreciation (Straight Line Method) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867)
Annual Saving by New System $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000
Addition in Profit $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133
Tax on Profit @ 40% $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053) $ (10,053)
Depreciation (Straight Line Method) $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867
After Tax Cash Flows $ (149,200) $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947
Cost of Capital @ 15% 1.0000 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 0.2149 0.1869 0.1625 0.1413 0.1229
Present Value of Future Cash Flows $ (149,200) $ 22,562 $ 19,619 $ 17,060 $ 14,835 $ 12,900 $ 11,217 $ 9,754 $ 8,482 $ 7,376 $ 6,414 $ 5,577 $ 4,850 $ 4,217 $ 3,667 $ 3,189

Net Present Value (NPV) $ 2,520 Internal Rate of Return (IRR) 15.348%
Internal Rate of Return (IRR) 15.348%
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Timeline
Particulars 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Cash Flows After Tax $ (149,200) $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947
Cumulative Cash Flows $ (149,200) $ (123,253) $ (97,307) $ (71,360) $ (45,413) $ (19,467) $ 6,480 $ 32,427 $ 58,373 $ 84,320 $ 110,267 $ 136,213 $ 162,160 $ 188,107 $ 214,053 $ 240,000
Fraction Row - - - - - - 0.75 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25

Payback Period
Full years where Cash Flow is - ve 5.00
Partial years where Cash Flow is - ve 0.75
Payback Period (Years) 5.75

Limitations of Payback
Payback period method ignores the cashflows after the payback period. Payback method also completely ignores profitability of projects. These are the reasons that Payback method is considered to put long-term investments of EPC at a relative disadvantage.
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Timeline
Particulars 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Cash Flows After Tax $ (149,200) $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947 $ 25,947
Cost of Capital @ 15% 1.0000 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 0.2149 0.1869 0.1625 0.1413 0.1229
Present Value $ (149,200) $ 22,562 $ 19,619 $ 17,060 $ 14,835 $ 12,900 $ 11,217 $ 9,754 $ 8,482 $ 7,376 $ 6,414 $ 5,577 $ 4,850 $ 4,217 $ 3,667 $ 3,189
Cumulative Cash Flows $ (149,200) $ (126,638) $ (107,018) $ (89,958) $ (75,123) $ (62,223) $ (51,005) $ (41,251) $ (32,769) $ (25,393) $ (18,980) $ (13,403) $ (8,553) $ (4,336) $ (669) $ 2,520
Fraction Row 0.21

Payback Period
Full years where Cash Flow is - ve 14.00
Partial years where Cash Flow is - ve 0.21
Discounted Payback Period (Years) 14.21
Cost of Equipment Recovery from replacement of Old System
Equipment Delivered Cost $ (158,000) Sale Price $ 20,000 Page 4/5
Installation Charges $ (5,000) Installation Charges $ (1,000)
$ (163,000) $ 19,000
Book Value $ 6,000
Profit from sale $ 13,000
Old System Recovery & Removal Tax $ (5,200)
Sale Price before Tax $ 20,000
Removal Charges $ (1,000)
$ 19,000
Current Book Value of the Equipment $ 6,000
Gain in sale of Equipment $ 13,000

Tax @ 40% $ (5,200)

Timeline
Particulars 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Cost of New Equipment $ (163,000)
Sale of Old System Excluding Tax $ 13,800
Depreciation (Sum of Digits) $ (20,375) $ (19,017) $ (17,658) $ (16,300) $ (14,942) $ (13,583) $ (12,225) $ (10,867) $ (9,508) $ (8,150) $ (6,792) $ (5,433) $ (4,075) $ (2,717) $ (1,358)
Saving due to New System $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000
Addition in Profit $ 15,625 $ 16,983 $ 18,342 $ 19,700 $ 21,058 $ 22,417 $ 23,775 $ 25,133 $ 26,492 $ 27,850 $ 29,208 $ 30,567 $ 31,925 $ 33,283 $ 34,642
Tax @ 40 % $ (6,250) $ (6,793) $ (7,337) $ (7,880) $ (8,423) $ (8,967) $ (9,510) $ (10,053) $ (10,597) $ (11,140) $ (11,683) $ (12,227) $ (12,770) $ (13,313) $ (13,857)
Depreciation (Straight Line Method) $ 20,375 $ 19,017 $ 17,658 $ 16,300 $ 14,942 $ 13,583 $ 12,225 $ 10,867 $ 9,508 $ 8,150 $ 6,792 $ 5,433 $ 4,075 $ 2,717 $ 1,358
After Tax Cash Flows $ (149,200) $ 29,750 $ 29,207 $ 28,663 $ 28,120 $ 27,577 $ 27,033 $ 26,490 $ 25,947 $ 25,403 $ 24,860 $ 24,317 $ 23,773 $ 23,230 $ 22,687 $ 22,143
Cost of Capital @ 15% 1.0000 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 0.2149 0.1869 0.1625 0.1413 0.1229
Present Value $ (149,200) $ 25,870 $ 22,084 $ 18,847 $ 16,078 $ 13,710 $ 11,687 $ 9,959 $ 8,482 $ 7,221 $ 6,145 $ 5,227 $ 4,443 $ 3,776 $ 3,206 $ 2,721

Net Present Value $ 10,256 Internal Rate of Return (IRR) 16.488%

Internal Rate of Return (IRR) 16.488%
Cost of Equipment Recovery from replacement of Old System
Delivered Equipment Cost $ (158,000) Sale Price $ 20,000 Page 5/5
Installation Charges $ (5,000) Installation Charges $ (1,000)
$ (163,000) $ 19,000
Book Value $ 6,000
Profit from sale $ 13,000
Old System Recovery & Removal Tax $ (6,500)
Sale Price $ 20,000
Removal Charges $ (1,000)
$ 19,000
Current Book Value of the Equipment $ 6,000
Gain in sale of Equipment $ 13,000

Tax @ 50% $ (6,500)

Timeline
Particulars 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Cost of Equipment $ (163,000)
Sale of Old System $ 19,000
Depreciation (SLA) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867) $ (10,867)
Savings of new system $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000
Inc/Dec in profits $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133 $ 25,133
Tax $ (6,500) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567) $ (12,567)
Depreciation (SLA) $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867 $ 10,867
After Tax Cash Flows $ (150,500) $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433 $ 23,433
Cost of Capital @ 15% 1.0000 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 0.2149 0.1869 0.1625 0.1413 0.1229
Present Value of Future Cash Flows $ (150,500) $ 20,377 $ 17,719 $ 15,408 $ 13,398 $ 11,651 $ 10,131 $ 8,809 $ 7,660 $ 6,661 $ 5,792 $ 5,037 $ 4,380 $ 3,809 $ 3,312 $ 2,880

Net Present Value $ (13,477) Internal Rate of Return (IRR) 13.120%

Internal Rate of Return (IRR) 13.120%