Chapter 10: Developing Project Cash Flows
Generating Net Cash Flows
10.1
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Income Statement
Revenues $35,000 $35,000 $35,000 $35,000 $35,000 $35,000
Expenses
O&M $12,000 $12,000 $12,000 $12,000 $12,000 $12,000
Depreciation $13,000 $20,800 $12,480 $7,488 $7,488 $3,744
Taxable Income $10,000 $2,200 $10,520 $15,512 $15,512 $19,256
10.2 Investment in industrial robot:
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Income Statement
Revenues $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000
Expenses
O&M
Depreciation $42,000 $67,200 $40,320 $24,192 $24,192 $12,096 $0
10.3 The income and cash flow statements are as below:
0 1 2 3 4 5
Income Statement
Revenues $3,833,542 $3,833,542 $3,833,542 $3,833,542 $3,833,542
Expenses
O&M $435,000 $485,000 $535,000 $585,000 $635,000
Depreciation $294,872 $307,692 $307,692 $307,692 $294,872
10.4 A local delivery company
0 1 2
Income Statement
Revenues $10,000 $10,000
Expenses
O&M $3,000 $3,000
Depreciation $3,000 $2,400
10.5 Investment in an answering device:
• Depreciation: It is assumed that the building will be placed in service in
January during the first project year. Then, it will be depreciated based on 39–
year MACRS.
• Gains and losses:
• Project cash flows
Property Cost Salvage Book Gains Gains
10.6 Investment in a new trench excavator:
Income Statement
Revenues
Expenses
Required annual digging(ft) 6400 6400 6400 6400 6400
Number of hours to operate 400 400 400 457 533
Operating cost (@50/hr) $20,000 $20,000 $20,000 $22,857 $26,667
Depreciation $50,000 $80,000 $48,000 $28,800 $14,400
10.7
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Income Statement
Revenues $72,000 $72,000 $72,000 $72,000 $72,000
Expenses
Software development $20,000
Cash Flow Statement
Operating Activities:
Net Income $10,530 $15,418 $24,071 $29,262 $33,156
Depreciation $20,800 $33,280 $19,968 $11,981 $5,990
Investment Activities
10.8
Since the net margin is 7.45%, we can easily estimate the net income each year as follows:
A = $4,236(0.0745)X where X is the sales volume.
0 1 2 3 4 5 6 7 8
Operating Activities
Net Income 4236(0.0745)X 4236(0.0745)X 4236(0.0745)X 4236(0.0745)X 4236(0.0745)X 4236(0.0745)X 4236(0.0745)X 4236(0.0745)X
Depreciation 35,725,000 61,225,000 43,725,000 31,225,000 22,325,000 22,300,000 22,325,000 11,150,000
10.9
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Income Statement
Revenues $320,000 $320,000 $320,000 $320,000 $320,000 $320,000
Expenses
Labor & Mat‘l Costs $130,000 $130,000 $130,000 $130,000 $130,000 $130,000
Depreciation $30,000 $48,000 $28,800 $17,280 $17,280 $8,640
Cash Flow Statement
10.10
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Income Statement
Revenues $250,000 $250,000 $250,000 $250,000 $250,000
Expenses
O&M $50,000 $50,000 $50,000 $50,000 $50,000
Depreciation $46,000 $73,600 $44,160 $26,496 $13,248
Taxable Income $154,000 $126,400 $155,840 $173,504 $186,752
Income Taxes (40%) $61,600 $50,560 $62,336 $69,402 $74,701
10.11
Investment in energy management system: N = 7 years
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Income Statement
Revenues $14,000 $14,000 $14,000 $14,000 $14,000 $14,000 $14,000
Expenses
O&M $0 $0 $0 $0 $0 $0 $0
Depreciation $18,332 $24,448 $8,146 $4,076 $0 $0 $0
Cash Flow Statement
Operating Activities:
Net Income ($2,815) ($6,791) $3,805 $6,451 $9,100 $9,100 $9,100
Depreciation $18,332 $24,448 $8,146 $4,076 $0 $0 $0
10.12 Investment decision based on after-tax IRR:
0 1 2 3 4 5
Income Statement
Revenues $150,000 $150,000 $150,000 $150,000 $150,000
Expenses
O&M $30,000 $30,000 $30,000 $30,000 $30,000
Depreciation $115,958 $154,646 $51,525 $25,780 $0
Taxable Income $4,042 ($34,646) $68,475 $94,220 $120,000
Cash Flow Statement
Investment in Working Capital
10.13
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Income Statement
Revenues $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000
Expenses
Production cost $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000
Depreciation:
Building $36,860 $38,462 $38,462 $38,462 $38,462 $38,462 $38,462 $38,462 $38,462 $36,860
Equipment $74,308 $127,348 $90,948 $64,948 $46,436 $46,384 $46,436 $23,192 $0 $0
Taxable Income $198,833 $144,191 $180,591 $206,591 $225,103 $225,155 $225,103 $248,347 $271,539 $273,141
Income Taxes (40%) $79,533 $57,676 $72,236 $82,636 $90,041 $90,062 $90,041 $99,339 $108,615 $109,256
10.14
0 1 2 3 4 5 6
Income Statement
Revenues $65,800 $65,800 $65,800 $65,800 $65,800 $65,800
Expenses
Operating cost $9,150 $9,150 $9,150 $9,150 $9,150 $9,150
Depreciation $17,100 $27,360 $16,416 $9,850 $9,850 $4,925
Cash Flow Statement
Operating Activities:
Net Income $25,708 $19,039 $26,152 $30,420 $30,420 $33,621
Depreciation $17,100 $27,360 $16,416 $9,850 $9,850 $4,925
10.15
Income Statement
Revenues $50,000,000 $55,000,000 $60,500,000 $66,550,000 $73,205,000 $80,525,500 $72,472,950 $65,225,655 $58,703,090 $52,832,781
Expenses
R&D expenses ($500,000) ($2,500,000) ($2,000,000) $40,000,000 $44,000,000 $48,400,000 $53,240,000 $58,564,000 $64,420,400 $57,978,360 $52,180,524 $46,962,472 $42,266,224
Production cost
Depreciation:
Building $49,146 $51,282 $51,282 $51,282 $51,282 $51,282 $51,282 $51,282 $51,282 $49,146
Equipment $428,700 $734,700 $524,700 $374,700 $267,900 $267,600 $267,900 $133,800 $0 $0
Taxable Income ($500,000) ($2,500,000) ($2,000,000) $9,522,154 $10,214,018 $11,524,018 $12,884,018 $14,321,818 $15,786,218 $14,175,408 $12,860,049 $11,689,336 $10,517,410
Income Taxes (40%) ($200,000) ($1,000,000) ($800,000) $3,808,862 $4,085,607 $4,609,607 $5,153,607 $5,728,727 $6,314,487 $5,670,163 $5,144,020 $4,675,734 $4,206,964
Net Income ($300,000) ($1,500,000) ($1,200,000) $5,713,292 $6,128,411 $6,914,411 $7,730,411 $8,593,091 $9,471,731 $8,505,245 $7,716,029 $7,013,602 $6,310,446
Effects of Borrowing
10.16
0 1 2 3 4 5
Income Statement
Revenues $3,833,542 $3,833,542 $3,833,542 $3,833,542 $3,833,542
Expenses
O&M $435,000 $485,000 $535,000 $585,000 $635,000
Depreciation $294,872 $307,692 $307,692 $307,692 $294,872
Debt interest $1,550,000 $1,296,114 $1,016,839 $709,637 $371,715
Taxable Income $1,553,670 $1,744,736 $1,974,011 $2,231,213 $2,531,955
Income Taxes (35%) $543,785 $610,658 $690,904 $780,925 $886,184
Net Income $1,009,886 $1,134,078 $1,283,107 $1,450,288 $1,645,771
Cash Flow Statement
10.17
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Income Statement
Revenues $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000
Expenses
Cash Flow Statement
Operating Activities:
Net Income $56,550 $42,120 $61,542 $73,975 $75,925 $85,738 $95,550
Depreciation $42,000 $67,200 $40,320 $24,192 $24,192 $12,096 $0
10.18
• Annual payment =
$115, 000( / ,11%,5) $31,116A P =
• New after–tax cash flow
0 1 2 3 4 5
Income Statement
Revenues $250,000 $250,000 $250,000 $250,000 $250,000
Expenses
O&M $50,000 $50,000 $50,000 $50,000 $50,000
Depreciation $46,000 $73,600 $44,160 $26,496 $13,248
Debt interest $12,650 $10,619 $8,364 $5,861 $3,084
Taxable Income $141,350 $115,781 $147,476 $167,643 $183,668
Income Taxes (40%) $56,540 $46,312 $58,990 $67,057 $73,467
10.19
0 1 2
Operating activities
Net income $10,400 $12,019
Depreciation $6,666 $4,445
Investment Activities
10.20 Income statement approach:
(a) Development of after-tax cash flows
Input Output
Tax Rate(% )= 40 PW(i) = $290,751
MARR(%) = 18 IRR(%) = 68.58%
(a)
0 1 2 3 4 5 – 7 8 9 10
Income Statement
Revenues:
Additional revenue $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000
Labor & materials savings 65,000$ 65,000$ 65,000$ 65,000$ 65,000$ 65,000$ 65,000$ 65,000$
Cash Flow Statement
Operating Activities:
Net Income 64,657$ 53,353$ 64,753$ 73,513$ 78,212$ 84,113$ 90,000$ 90,000$
Depreciation 31,438$ 53,878$ 38,478$ 27,478$ 19,646$ 9,812$ –$ –$
Investment Activities:
10.21 (a) and (b)
Input Output
Tax Rate(%) = 35 PW(i) = ($1,648,462)
MARR(%) = 18 AE(i)= ($527,142)
0 1 2 3 4 5
Income Statement
Revenues (savings)
Expenses:
Depreciation 357,250 612,250 437,250 312,250 111,625
10.22
(a) After–tax cash flow
Input Output
Tax Rate(%) = 35 PW(i) = $6,718.77
MARR(%) = 15 IRR(%) =
0 1 2 3 4 5 6
Income Statement
Revenues (savings) $13,000 $13,000 $13,000 $13,000 $13,000 $13,000
Expenses:
Cash Flow Statement
Operating Activities:
Net Income $760 ($1,791) $741 $2,746 $4,395 $6,382
(b) No meaningful IRR exists. We need to use present worth analysis.
Since the NPW (15%) is positive, this project is acceptable.