Example

Independent Speedy Printing of Fairfax has the following expected annual income and expense:

Year

1 |

2

3

4

5

income

5100,000 I

S120.0W

£ 150,000

5200,000

SI30,000 |

SI 20.000

SI 30,000

5180,000

SI 60,000

In the beginning of year 1 it buys a copying machine for $15,000. The company is using the

straight-line depreciation method and life of five years for the machine and assumes no resale value at the of its life. The company's tax rate is 32%. At the end of five years, they sell the machine for $3,000 and th printing business for $200,000. Assume that the company has other income to deduct the losses from. At a interest rate of10% what are the NPW, NFW, EUAW, and ROR of this project?

Solution:

Taxable Income (IBT) = Operating Profit - Depreciation

Tax - 32% of IBT; therefore, income after tax, I AT = OP-TAX

Financial analysis is facilitated by construction ofthe following table.

Year

Total Income 1

Total Expense 2

Operating Profit 3=1-2

5

Taxable Income 6=3-4

Tax 7=6*TR

7

0

15000

1

100,000

130,000

-30,000

3,000

12000

-33,000

-10,560

-19,4

2

120,000

120,000

00,000

3,000

9000

-3,000

-960

96

3

150,000

130,000

20,000

3,000

6000

17,000

5,440

14,5

4

200,000

180,000

20,000

3,000

3000

17,000

5,440

Eqp.Resale

Total

180,000 200,000 3,000 383,000

160,000

20,000

3,000

0

17,000 200,000 3000

5,440 64,000 960

14,5 136,0 2,0 152,6

Note that at year 4 we have two extra incomes. The sale of the business brings in $200,000. Since the book value at the end of year 5 is zero, the capital gain is 3,000 - 0 = 3,000. The taxes on these two incomes are at 32% and are shown separately in column 6. The cash flow diagram is

NPW =>-15000 - 19440 (P/F, 10,1} + 960(P/Ff 10.2) +14560 (P/F, 10,3)+ 145&0 (P/F, 10,4) + 152.600 (P/F.! 0.5) =-■ SI.765 64 LU AW - TS'PW (A/P,I0,5 ) 21,092.16

NfW ■ - 15,000 ff/P, 10,5) - 19440 (f/P, 10,4) + (F/P,10,3) +14550 (F/P,10,2) + 14550 (F^T3,10,1) +152600 =134,903.88 KOR by trial .arxJ error -48.06%

A suitable semi-generic spreadsheet can be constructed to solve this kind of problem as shown below. As usual, the difference between the outcome from the spreadsheet and the manual calculation is due to rounding of numbers. The spreadsheet shown is actually the representation of the top line of the generic table constructed for comprehensive Example 8.6 and can be used for all problems of this kind with minimum adjustment.

■ i m H

à"j m

fcc 0

E ï F

a , n

|

J

JL.

Eitéih^I« SE

1

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E

ïiiitHte D

hirfir

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tibn SI I 3,000

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20 OM

3000

woo

17,000 17,000

Q44D

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13

<

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17.006

S«0

1UC0

IS

3

203,ono

201000

îOJ.ÛOO

64-9E0

lîijwaT

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m

D

1

2

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it

Cwift

360

14.660 14JHÛ

152,600

|

* NU «thflaw Inthtlm ^ir î IN» mm of tft* *trti m vlw« oith»*icemtffom

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Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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