Net cash flow from operation

1 2 3 4 5
Sales in units 68000 79000 105000 83000 64000
Sales in $ 18700000 21725000 28875000 22825000
17600000
less variable cost 6596000 7663000 10185000 8051000
6208000
less fixed cost 3400000 3400000 3400000 3400000
3400000
less depreciation 2929450 5020450 3585450 2560450
1830650
Earnings before taxes 5774550 5641550 11704550 8813550
6161350
less taxes 2021092.5 1974543 4096592.5 3084743
2156473
Earnings after taxes 3753457.5 3667008 7607957.5 5728808
4004878
add deprecation 6682907.5 8687458 11193407.5 8289258
5835528
less/ working capital 3740000 605000 1430000 -1210000
-4565000
add equipment value net of taxes 3875743
Net cash flows after taxes 2942907.5 8082458 9763407.5 9499258 14276271

Depreciation under MACRS

1 14.29 20500000 2929450
2 24.49 20500000 5020450
3 17.49 20500000 3585450
4 12.49 20500000 2560450
5 8.93 20500000 1830650 15926450 20500000
6 8.92 20500000 1828600 4573550
7 8.93 20500000 1830650
8 4.42 20500000 906100
20491800

Note:
1 we are assuming that the development cost is included in the fixed cost.
2 All working capital will be recouped in the 5th year.
3 The book value of equipment is more than the market value at the end of 5the year hence the tax benefit
on the loss has been adjusted to determine the cash flow from equipment at the end of 5th year.

1)
Payback period Net flow Cumulative
1 2942908 2942908 1
2 8082458 11025365 1
3 9763408 20788773 0.97042293 9474635
4 9499258 30288030
5 14276271 44564301
2.97 years
or
3 years
 2)
Profitability index Net flow D.F - .12 PV
1 2942908 0.892857 2627595.982
2 8082458 0.797194 6443285.635
3 9763408 0.71178 6949400.61
4 9499258 0.635518 6036949.873
5 14276271 0.567427 8100739.281
30157971.38

PI - 1.47

3)
0 (20,500,000)
1 2942908
2 8082458
3 9763408
4 9499258
5 14276271

IRR 26.14%

4)
Present value of inflows 30157971.38
less initial investment (20,500,000)
NPV positive 9,657,971

5)
Sensitivity analysis by using break even point
Contribution margin 275-97 178

Highest fixed cost 8420450

Contribution margin required to make

cover fixed cost 106.5879747
add variable cost 97
The selling price may be reduced to 203.5879747

At this selling price break even is

204-97 107
78695.79439 units
The price may be reduced by
275-204 71
in % 0.258181818
If the price decreases by around 25% company will be in no profit no loss situation

6)
Break even at the current price 47305.89888

The difference in quantity

79000-47305 31695
If qty is decrease by 0.401202532

If decrease in quantity is 40% the company will be in no profit no loss situation.

7)
Keeping in view the NPV and IRR the company can go for this project.

8)
Definitely the affect of decrease in sales should be taken as it will reduce the profitability of the company as well.
 0

3500000
-1073550
-375742.5
3875743

the tax benefit

he company as well.