Present System Acme Building Gross Profit $ 600,000 $ 1,200,000 Less Depreciaton to 300,000 S 450,000 What does the new systems cost? Profit Before Tax 300,000 $ 750,000 What will you get for selling the three existing systems? Think Salvage Value 0.45 Tax at 45% 135,000 $ 337,500 The difference equals your cash flow for Year O for the new acquisition. Profit After Tax 165,000 $ 412,500 Power function = (1+IRR, Year) Add Depreciation 300,000 $ 450,000 NPV - Positive Discounted Cash Flows - Net initial investment After Tax Cash Flow 465,000 S 862,500 IRR 10% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 0 2 3 5 6 7 8 9 10 Acme Use depreciation x 10 Year Cash Flows IRR Power function Discounted Cash Flow NPV Present Use depreciation x 10 Year Cash Flows IRR Power function Discounted Cash Flow NPV

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Present System Acme Building Gross Profit 600,000 $ 1,200,000 Less Depreciaton $ 300,000 $ 450,000 What does the new systems cost? Profit Before Tax $ 300,000 $ 750,000 0.45 Tax at 45% $ 135,000 $ 337,500 Profit After Tax $ 165,000 $ 412,500 What will you get for selling the three existing systems? Think Salvage Value The difference equals your cash flow for Year 0 for the new acquisition. Power function = (1+IRR, Year) Add Depreciation $ After Tax Cash Flow $ 300,000 $ 465,000 $ 450,000 862,500 NPV - Positive Discounted Cash Flows - Net initial investment IRR Acme Use depreciation x 10 Year Cash Flows IRR Power function Discounted Cash Flow NPV Present Use depreciation x 10 Year Cash Flows IRR Power function Discounted Cash Flow NPV 10% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 0 1 2 3 4 5 6 7 8 9 10 Present System Acme Building Gross Profit 600,000 $ 1,200,000 Less Depreciaton $ 300,000 $ 450,000 What does the new systems cost? Profit Before Tax $ 300,000 $ 750,000 0.45 Tax at 45% $ 135,000 $ 337,500 Profit After Tax $ 165,000 $ 412,500 What will you get for selling the three existing systems? Think Salvage Value The difference equals your cash flow for Year 0 for the new acquisition. Power function = (1+IRR, Year) Add Depreciation $ After Tax Cash Flow $ 300,000 $ 465,000 $ 450,000 862,500 NPV - Positive Discounted Cash Flows - Net initial investment IRR Acme Use depreciation x 10 Year Cash Flows IRR Power function Discounted Cash Flow NPV Present Use depreciation x 10 Year Cash Flows IRR Power function Discounted Cash Flow NPV 10% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 0 1 2 3 4 5 6 7 8 9 10