## 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 £ . ii * Coft 15,0» FWfli* T. Y** 1 E ïiiitHte D hirfir Ife F (jdoJwî 2M,mo: flohul 3,0(W TwFUti Kx tibn SI I 3,000 7 Jf 1 Vn. InMnw [Exptfd* OP | Dppr. El. VjIw IBT rJATj ;ft ■so.obo 110« JÏjOOT ■ 131+40 11 2 12A.WW m.OPC 10» »,01» -3Î0J -»0 12' 3 150,000 130.0C0 20 OM 3000 woo 17,000 17,000 Q44D Hjseo 13 < MO.OOO IW.OD0 20.000 j.ooa Î.OHJ »10 H.S80 m S 1M.U0 1M.0M 20.0W jdiM « 17.006 S«0 1UC0 IS 3 203,ono 201000 îOJ.ÛOO 64-9E0 lîijwaT L jpHiFl-jin =Gooi)wll -I* « luil ifulundii Natdtlw timt U i*jiuLirmcofllr m V« D 1 2 3Î * .. & [ it Cwift 360 14.660 14JHÛ 152,600 | * NU «thflaw Inthtlm ^ir î IN» mm of tft* *trti m vlw« oith»*icemtffom 1 Iw opirrtonj jfid ih-ii ol (hc joûd fill. 21 * Nfw foutwus+ ihf W^W IRR fprt-JdthHt 1 htmuI** «inth*|K*f 2lai u m ^■■l^mpiVHPHnHpHIBHflB^^MHf ri!inn:": rj JiW'ii

<><><><><><><><><><><><>