br />Warning, this is a study guide, not a cheat sheet.
1. Prepare a statement showing the incremental cash flows for this project over an 8-year
period.
-Initial investment:
The initial investment (I) is the sum of the investment in plant and equipment.
I = $1,000,000
-Working Capital:
The additional net investment in inventory and receivables is the working capital needed
for the project:
WC = $200,000
There is no additional info about the WC, so we can assume that it will not change over the
projects life. Then Working Capital Change for each year Yi is: this is a study guide, not a
cheat sheet.
ChWCi = Previous Year WC – Current WC = 0 (for i=1 to 7) and
ChWC0 = -$200,000
The working capital is recovered, this means that for the end of the year 8 it will be zero
or: this is a study guide, not a cheat sheet.
ChWC8 = $200,000
-Depreciation:
For the first five years Yi (i = 1 to 5):
Di = (Invest in plant and equipment)/5 = $1,000,000/5 = $200,000
For the years 6 to 8 the depreciation will be zero. this is a study guide, not a cheat sheet.
-Revenues:
For the first year the expected revenues will be:
R1 = $950,000
For the years Yi (i=2 to 8):
Ri = $1,500,000
-Expenses:
Indirect incremental costs will be $80,000 all the eight years.
For each year the direct costs will be 0.55*Ri.
Then for each year Yi (i=1 to 8), the expenses (Ei) will be:
this is a study guide, not a cheat sheet.
Ei = $80,000+ 0.55*Ri,
Then:
E1 = $80,000 + 0.55*$950,000 = $602,500
