Info

5,972,000

Total projected cash flows

$ 7,202,000

$ 8,111,000

$ 7,996,720

$ 8,143,123

$ 8,554,361

$24,172,517

a Year 3 estimate increased by the assumed 6 percent inflation rate. b Sixty-five percent of net sales.

c MACRS depreciation rates were estimated as follows:

a Year 3 estimate increased by the assumed 6 percent inflation rate. b Sixty-five percent of net sales.

c MACRS depreciation rates were estimated as follows:

Year

Equipment 20 32 19 12 11 6

These percentages are multiplied by the depreciable basis to get the depreciation expense for each year. Not that the allowances have been rounded for ease of computation. d In this case, depreciation on building and equipment. e Net operating income plus noncash expenses.

f Twelve percent of next year's increase in sales. For example, year 4 sales are $3.3 million over year 3 sales, so the addition to NWC in year 3 required to support year 4 sales is (0.12)($3,300,000) = $396,000. The cumulative working capital investment is recovered when the project ends. g See Table 15.3 for the net salvage value calculation.

As illustrated by this SVCC example, cash flow estimation involves a detailed analysis of demand, cost, and tax considerations. Even for fairly simple projects, such as that described here, the analysis can become complicated. Innovative, powerful spreadsheet software makes possible the accurate estimation of cash flows under a variety of operating assumptions, for even the most complex projects. More than just allowing managers to enter and manipulate data in several useful ways, these spreadsheet programs also incorporate various effective techniques for project evaluation. Among these techniques are a number of valuable capital budgeting decision rules.

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