Manufacturing Company

Manufacturing Company

Cash Flow

Year

0

1

2

3

4

5

6

7

8

Sales

 

$950,000

$1,500,000

$1,500,000

$1,500,000

$1,500,000

$1,500,000

$1,500,000

$1,500,000

Less: Direct Cost

 

$522,500

$825,000

$825,000

$825,000

$825,000

$825,000

$825,000

$825,000

Less: Indirect Cost

 

$80,000

$80,000

$80,000

$80,000

$80,000

$80,000

$80,000

$80,000

Less: Depreciation

 

$200,000

$200,000

$200,000

$200,000

$200,000

 

 

 

EBIT

 

$147,500

$395,000

$395,000

$395,000

$395,000

$595,000

$595,000

$595,000

Taxes

 

$51,625

$138,250

$138,250

$138,250

$138,250

$208,250

$208,250

$208,250

EAT

 

$95,875

$256,750

$256,750

$256,750

$256,750

$386,750

$386,750

$386,750

Add: Depreciation

 

$200,000

$200,000

$200,000

$200,000

$200,000

 

 

 

Cash Flow from Operation

 

$295,875

$456,750

$456,750

$456,750

$456,750

$386,750

$386,750

$386,750

Investment

-$1,200,000

 

 

 

 

 

 

 

$200,000

Net Cash flow

-$1,200,000

$295,875

$456,750

$456,750

$456,750

$456,750

$386,750

$386,750

$586,750

2. NPV

Year

Cash Flow

PV Factor @10%

Present Value

0

-$1,200,000

1

-$1,200,000

1

$295,875

0.909091

$268,977

2

$456,750

0.826446

$377,479

3

$456,750

0.751315

$343,163

4

$456,750

0.683013

$311,966

5

$456,750

0.620921

$283,606

6

$386,750

0.564474

$218,310

7

$386,750

0.513158

$198,464

8

$586,750

0.466507

$273,723

 

 

NPV

$1,075,689

3. Payback Period

Year

Cash Flow

Cumulative Cash Flow

0

-$1,200,000

-$1,200,000

1

$295,875

-$904,125

2

$456,750

-$447,375

3

$456,750

$9,375

4

$456,750

$466,125

5

$456,750

$922,875

6

$386,750

$1,309,625

7

$386,750

$1,696,375

8

$586,750

$2,283,125

So the Payback period is between year 2 and 3.Payback Period= 2+447375/456750=2.98 Years

Discussion

The only amount that needs to be recovered in Year 3 is $447,375, and the cash flow is $456,750, this means that the $447,375 would be recovered in a fraction of year 3. To calculate that fraction:

$447,375 / $456,750 = 0.98

Payback Period = 2.98 years

NPV = $1,075,689

Since the NPV is positive, the project should be accepted. Using the payback period criterion, the project ...