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 Subject: Finance Category: Business and Money > Finance Asked by: baseball2-ga List Price: \$10.00 Posted: 25 Jul 2005 17:53 PDT Expires: 24 Aug 2005 17:53 PDT Question ID: 547862
 ```Need help with a formula. The information I have is: Year Unit Sales 1 22,000 2 30,000 3 14,000 4 5,000 Thereafter 0 Working capital will amount to 20% of sales in the following year. Plant and equipment will require an investment of 200,000. THis investment will depreciated using MACRS and a 3 year life. AFter 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 35%. The dicount rate is 20% How do I calculate the value project?``` Request for Question Clarification by omnivorous-ga on 26 Jul 2005 06:52 PDT ```Baseball2 -- You're missing one piece of information to solve this: the sales price per unit, which will allow you to calculate revenues and cash flow. Also, be sure to recapture your working capital in year 4. Best regards, Omnivorous-GA``` Request for Question Clarification by omnivorous-ga on 26 Jul 2005 08:03 PDT ```Baseball2 -- I started to set up this problem (even without price/unit) and realized that there's probably also a variable cost/unit that's missing. Best regards, Omnivorous-GA``` Clarification of Question by baseball2-ga on 26 Jul 2005 08:14 PDT ```I am so sorry. The following table that I gave you respresents sales forcast for a specific company. The unit price is 40.00 and the unit cost of the items is 25.00. Hope this helps!```
 ```Baseball2 ? The tricky part of this whole problem is actually in the working capital (WC) consumption. As a result, I?ve set up a spreadsheet with two sections ? one on PROFITS and one on CASH FLOW. This is similar to the cash budgeting process that a company would follow ? setting up income and expense budgets, then calculating cash consumption ? so in that sense it?s very realistic. Now, I?ll take you through the spreadsheet linked below, line-by-line: http://www.mooneyevents.com/cashflows.xls PROFITS ======== Line3: we use the ?Year 0? convention for upfront costs. Note that we have to put our first year?s working capital requirements in here when we get to cash flow. Line4: units Line5: units * \$40 to get Revenues Line7: gross profit can be figured with the contribution (\$15) * units Line8: depreciation, using the half-year Modified ACRS tables for 3-year assets The modified ACRS depreciation for a 3-year property based on the half-year convention are: Year 1: 33.33% Year 2: 44.45% Year 3: 14.81% Year 4: 7.41% Taxguide.com ?Depreciation Tables? http://taxguide.completetax.com/tools/deptables_m.asp Line9: profit before tax, which we?re calculating in order to be able to figure taxes Line11: taxes (at 35%) It?s not necessary to figure the actual accounting profit here, as the value of a project is in its cash flow. We could figure the net profits and add back depreciation but it?s really a useless step. CASH FLOW =========== Line15: our initial capital investment Line17: depreciation doesn?t use cash, so the ?Gross Profits? line shows cash coming in ? except for the taxes that we?ll pay each year Line18: one of the two inevitables of modern life: taxes (as the joke goes, the other is ?death?) Line19: here?s where we have to account for the working capital (WC) being used to buy materials for next year?s production Line20: each year WC is slightly different. It all gets consumed in year 0 as you invest in raw materials or work-in-process ? but after year 0 you are asking yourself whether it?s going up? Or down? If it?s going up, we?re spending \$\$ on working capital ? if it?s going down cash is freed. Line22: Gross Profits + taxes + change in WC (I?ve used red for negatives everywhere so it?s obvious what charges are for cash going out). Line24: NPV factor, which as you know, is calculated by: Year 1: 1/(1.2) Year 2: 1/(1.2)^2 Year 3: 1/(1.2)^3 Year 4: 1/(1.2)^4 Line26: discounted cash flow ? including the total for the project. At \$254,441 in positive discounted cash flow, this project would be a go despite the high discount rate of 20%. Google search strategy: MACRS + depreciation + percentage Search IRS site for: Modified ACRS + depreciation Best regards, Omnivorous-GA```
 baseball2-ga rated this answer: `As always a job well done. Thanks so much!`