Terminal-Year Incremental Cash Flows a Incremental cash flow from previous slide in Year 4. $26,075 b) +/Salvage Value +10,000 c) +/Tax or tax savings due to sale .40*($10,000-0) 4,000* d +/level of NWC Project ends. +5,000 e) Terminal-year incremental cash flow $37,075 *Note,the asset is fully depreciated at the end of Year 4. slide 10
slide 10 Terminal Terminal-Year Incremental Cash Flows Year Incremental Cash Flows a) Incremental cash flow from Incremental cash flow previous slide in Year 4. $26,075 $26,075 b) +/- Salvage Value + 10,000 c) +/- Tax or tax savings due to sale .40*($10,000 - 0) - 4,000* d) +/- level of NWC - Project ends. + 5,000 e) = Terminal = Terminal-year incremental cash flow year incremental cash flow $37,075 $37,075 *Note, the asset is fully depreciated at the end of Year 4
Summary of Project Net Cash Flows Asset Expansion Year 0 Year 1 Year 2 Year 3 Year 4 -$75,000 $33,332 $36,446 $28,147 $37,075 slide 11
slide 11 Summary of Project Net Cash Flows Summary of Project Net Cash Flows Asset Expansion Year 0 Year 1 Year 2 Year 3 Year 4 -$75,000 $75,000 $33,332 $33,332 $36,446 $36,446 $28,147 $28,147 $37,075 $37,075
In General,the Value of an Action p-a Market Value of Financial Instrument Depends on Cash Flow Characteristics and Required Return/ slide 12
slide 12 In General, the Value of an Action Market Value of Financial Instrument Depends on Cash Flow Characteristics and Required Return rt ∑ + = t t t r C PV )1(
Opportunity Cost r Suppose an investor is considering buying security A. -A will only be purchased if the expected return is at least as high as the return that could have been earned elsewhere. -The amount that could have been earned elsewhere is the opportunity cost or the reguired return on the asset. When we compute NPV,we discount at the required return. slide 13
slide 13 Opportunity Cost Opportunity Cost rt Suppose an investor is considering buying security A. A will only be purchased if the expected return is at least as high as the return that could have been earned elsewhere. The amount that could have been earned elsewhere is the opportunity cost or the required return on the asset. When we compute NPV, we discount at the required return
The financial market economy Consumption next year $115,000 A A=$60,000+($50,000*(1+0.1) B=$50,000+($60,000/(1+0.1) $60,000 B Consumption this year $50,000 $104,545 slide 14
slide 14 The financial market economy The financial market economy Y A B $60,000 $50,000 Consumption next year Consumption this year A=$60,000+($50,000*(1+0.1)) B=$50,000+($60,000/(1+0.1)) $104,545 $115,000