GHOST SQUADRON HISTORICAL AIRCRAFT, INC. 3 5 7 3 5 7 3 $40,000 5 105 105 7 $94,318 $91,875 $51,656 3 5 7 3 5 7 3 5 ASSUMPTIONS: MACRS Depreciation Tax rate Cost of capital ESTIMATED INCREMENTAL CASH FLOWS: Initial Investment at t=O: Crew transport & wreckage collection Trans ort to restoration facility Plane restoration Total Initial Investment Year: New Revenues Additional operating expenses Depreciation on plane Change in Operating Income Tax on new income Change in Eamings after tax Add backdepreciation Net Incremental Cash Flows Additional Cash Flows at the end of year 7: Proceeds from sale of plane Book value of plane Taxable gain(loss) Tax on gain Net cash flow from sale of plane Salvage valueless tax on gain SUMMARY OF NET CASH FLOWS: Time: Net present Value: Internal rate of Return: Yrl 14.3% 35% 12% $100,000 $35,000 $600,000 $735,000 $0 $145,105 50 787 $105,105 $10,787 $500,000 33 075 $466,925 $163,424 $303,501 Yr2 24.5% Yr3 17.5% Yr4 12.5% Yr5 8.9% These are outgoing funds so they're recorded asypegative. These are putgoing funds so they're recorded asynegative. These are outgoin funds so the 're recorded as ne ative. 2 $0 $40,000 180 075 $220,075 77 026 $143,049 $180,075 $37,026 From the pext problem From the text problem 3 $70,000 $40,000 128 625 $98,625 34 519 $64,106 $128,625 $64,519 4 $70,000 $40,000 91 875 $61,875 21 656 $40,219 5 $70,000 $40,000 65 415 $35,415 12 395 $23,020 $65,415 $42,395 Yr6 8.9% 6 $70,000 $40,000 65 415 $35,415 12 395 $23,020 $65,415 $42,395 Yr7 8.9% 7 $70,000 $40,000 65 415 $35,415 12 395 $23,020 $65,415 $42,395 6 Yr8 4.5% Positive because they're incoming funds Negative because they're expenses and therefore outgoing funds Will be negative because total initial investment was negative Will be negative because you're adding additional operating expenses to depreciation Can be positive OR negative depending on whether you want to add a negative or subtracta ositive to Will still be negative as incomin funds are smaller than outgoin funds Co de reciation value from row 36: Can be ositive OR ne ative, same as the note for row 38! et chan e in eamin s Now that ou've shielded some income from tax, ou need to add back depreciation to "restore" the true value: Add Chan e in Eamin safter Subtract Book Value from Sale Price Calculate the tax on the ain or no tax if there's a loss but trust me, it's a Salva e Value and Book Value are interchan able here 2 3 4 ain 5 7 These do not line u $42,395 under the corres ondin ears in row 43! Year 0 so ne ative Total Initial Investment (B30) here. The rest of the years are copied from Row 43. $735,000 $10,787 $37,026 $64,519 $51 ,656 $42,395 $42,395 $552,388 Use the ran e for ears 1 throu h 7 NOT includin ear 0 ou'll ADD ear 0 after ou calculate NPV which accounts for the negative initial investment. =NPV cost of capital, range + ear 0 -18.3% Unlike NPV, IRR will use the range STARTING in Year 0 and use something like 0.1 as your "guess." =lRR(range, 0.1 Remember, IRR's "trial and error re uirement?" 0.1 works here. You're welcome tot some other values and see if the make a difference.