Cash Flow And Capital Budgeting
Professor Thomson
Fin 3013
Cash Flow Versus Accounting Profit
Capital budgeting concerned with cash flow, not
accounting profit.
To evaluate a capital investment, we must know:
Incremental cash outflows of the investment
(marginal cost of investment), and
Incremental cash inflows of the investment
(marginal benefit of investment).
2
The timing and magnitude of cash flows and
accounting profits can differ dramatically.
Financing Costs
Financing costs should be excluded when evaluating a
project’s cash flows (can separate the investment
decision from the financing decision).
Both interest expense from debt financing and
dividend payments to equity investors should be
excluded.
3
Financing costs are captured in the discounting
future cash flows to present i.e. use the correct
discount rate to adjust for the systematic risk of
the project.
Capital Investment Decisions
• The with and without principle – Capital project
evaluation should be done by assessing the cash
flows with and without undertaking the project.
I.e. We need to consider the INCREMENTAL
cash flows due to the project.
• Stand Alone Basis – another way of stating this
principle is to consider the project on a stand
alone basis (by looking only at the incremental
cash flows that result from this project).
4
Other Considerations
• Sunk Costs - A sunk cost is a cost that has been
expended in the past, and whether you do or do not
undertake the project, these costs no longer effect the
incremental cost of the project.
• Opportunity cost – There is no such thing as a free
lunch. If a firm already owns something that can be
applied to a new project – it could also be sold on
Ebay. The amount you could sell it for on Ebay
represents the opportunity cost of using an existing
asset on a new project.
• Side effects – In considering the incremental costs, one
has to consider any side effects. If additional
advertising of our new product, also increases sales of
our other products, these sides effects must be part of
the incremental costs (also cannibalization).
5
Net Working Capital
• New or expanded projects often require
additional working capital (such as additional
inventory) that must be considered as part of
the incremental cost of the project.
• For project analysis, the simplest case is when
additional working capital is required at the
beginning of the project that will be brought
back to base line levels at the end of the project.
6
Investment Pro Forma
• A pro forma is the standard analysis of
cash flows that one does to determine if a
proposed capital project is a good
investment.
• A pro forma includes listing the expected
cash flows over time, and computing of
the investment criteria such as NPV, IRR,
PI, and Payback.
7
Investment Pro Forma (simplified)
Source
Time 0
OCF
8
1
2
3
OCF1
OCF2
OCF3
NWC
-NWC
NWC
Investment
-Invest
Total ATCF
ATCF0
Salvage
(ATCF)
ATCF3
ATCF1
ATCF2
All numbers are ATCF’s
Investment Pro Forma (simplified)
A project that costs 100 and requires 20 of new net
working capital will provide incremental operating
cash flows of $60 for the next three years. The after
tax cash flow from salvaging the equipment will be
15. What are the project’s ATCF? What is the IRR?
Source
OCF
NWC
Investment
Total ATCF
9
Time 0
-20
-100
-120
1
2
3
60
60
60
60
60
20
15
95
Investment Cash Flows
Cash Flows from Investment Projects are
commonly separated into 3 components
1. Operating Cash Flows (OCF)
OCF = EBIT – Taxes + Depreciation
2. Change in Net Working Capital (NWC)
3. Investment Cost
Initial Investment at time period zero
At the end of the project you may recover some
of your investment cost if you can sell (salvage)
your capital goods.
All of the above are presented on an after tax
cash basis (i.e. they are ATCF’s)
10
The Idea of Depreciation
• Some people think of depreciation as the
wearing out of capital equipment (your car gets
old and unreliable)
• From an accounting viewpoint, depreciation has
a different interpretation
• Example: You can by a new TV for $1095 that
you think will last you 3 years (1095 days).
What is the daily cost of watching TV?
11
Depreciation (continued)
• Depreciation assigns the cost of a capital good
over the period you receive benefits from it.
• Warning: The cash flow occurred when you
bought the TV. If we consider the Depreciation
Expense as $1 per day for the three years we
watch TV, we have a depreciation expense each
day, but not a cash flow each day. We had a big
negative cash flow the day we bought the TV.
12
Depreciation (continued)
• When you pay someone wages to work on
a given day, you take a labor expense that
day, and you have a cash flow that day.
• We pay taxes on our profit, not on our
revenues. We deduct our costs from our
revenue to determine the profit that we
are taxed on.
13
Depreciation (continued)
• For capital goods, depreciation is a recognized
expense, but the cash flow occurred in the past
when the capital good was purchased.
• When the good was purchased, no tax
deduction for the expense of the good is
allowed. Instead, we use depreciation to smear
out the capital good cost over time. In other
words, we will get our tax deduction in the
future in response to a cost (cash flow) incurred
today.
• Depreciation expense, thus affects future taxes,
not current taxes.
14
Cash Flow and Non-Tax Expenses
• Accountants charge depreciation to spread a fixed
asset’s costs over time to match its benefits.
• Capital budgeting analysis focuses on cash inflows
and outflows when they occur.
• Non-cash expenses affect cash flow through their
impact on taxes – the investment cash flow made
at time period zero, reduced future taxes when
you are allowed to take a deduction for the
depreciation expense.
15
Depreciation
Many countries allow one depreciation method for
tax purposes and another for reporting purposes.
• Accelerated depreciation methods (such as
MACRS) increase the present value of an
investment’s tax benefits.
• Relative to MACRS, straight-line depreciation
results in higher reported earnings early in an
investment’s life.
For capital budgeting analysis, the depreciation
method for tax purposes matters most.
16
Depreciation: 1. Straight Line
1. Straight Line
Investment Cost-Salvage
Annual Depreciation=
Years Of Service
Example: Purchase a truck for $20,000 that
you will use for 5 years and then sell for
$4000
20000  4000
AnnualDepreciation 
 $3200 / yr
5
17
Depreciation: 2. MACRS
2. MACRS – Modified Accelerated Cost
Recovery System
Investments are classified into MACRS classes such as 3
year, 5 year, etc.
When using MACRS, salvage value is not considered
(implicitly assumed to be zero).
The annual depreciation percent for each class is stated
such as shown below for the 3-year asset class.
Year
Allowance
18
1
2
33.33% 44.44
3
4
14.82
7.41
Example MACRS Depreciation
You purchase a new capital asset that fits into
the 3 year MACRS class. The cost of the
asset is $1 million and you believe you can
sell it for $200,000 after three years of
service. What is your depreciation expense in
year 3?
Year
Allowance
1
2
33.33% 44.44
3
14.82
Answer: Year 3 Depreciation
= $1,000,000 x 0.1482 = 148,200.
19
4
7.41
Useful Formulas
Project ATCF = OCF – NWC – Investment
(Note: These are all ATCF’s)
OCF = EBIT – Taxes + Depreciation
(EBIT = Sales – Operating Costs – Depreciation)
Taxes = t*EBIT, where t = tax rate
Straight Line (Annual) Depreciation =
(Investment – Est. Salvage)/Years
ATCF from Salvage = Salvage – tax
(Salvage is the Sale Price of salvaged equipment)
tax = t(Salvage – BookVal) where t= tax rate,
BookVal = Investment – Accumulated Depreciation
20
Ex 9.1 ATCF from Salvage
(Straight Line Depreciation)
• You purchased a new lawnmower for
your Landscape business for $5000 that
you expected to use for 3 years, and
then sell for $500. After 2 years you
saw a great deal on another mower so
you decided to replace your mower, and
sold your old mower for $1500. What is
your ATCF from selling your old mower
(tax rate = 30%)?
21
Example 9.2 Computing OCF
• Noble’s Best Doughnuts is considering
buying a dough machine for $150,000 that
it will depreciate (straight line) over its
expected 3 year life. It expects to sell the
machine for $30,000 at that time.
Doughnut sales are projected to increase
$100,000 per year. Operating costs are
30% of sales. Noble pays a 34% tax on
its income. What are the incremental
OCF’s Noble can expect from this project
over the next 3 years?
22
Example 9.3 OCF with MACRS
• Same as 9.1, but use MACRS for computing the
depreciation, i.e. what are the OCF’s?
Year
Allowance
23
1
33.33%
2
44.44
3
14.82
4
7.41
Example 9.4: NWC simplified
• Noble’s Best Doughnuts will need
additional supplies of doughnut mix and
sprinkles to feed this machine. It
estimates it will need to keep an additional
$10,000 of baking supplies on hand during
the life of the project. What are the
ATCF’s associated with the change in NWC
to support this project?
24
Example 9.5 Investment CF’s
•
As noted earlier, Noble’s Best Doughnuts
will invest $150,000 on the new
doughnut machinery, and expects to sell
the used machinery after 3 years for
$30,000.
1. What is the ATCF from Salvage using
straight line depreciation?
2. What is the ATCF from Salvage using
MACRS?
3. What are the ATCF’s from investment?
25
Example 9.6
•
What will Noble’s pro forma look like for:
1. Straight Line depreciation
2. MACRS depreciation
•
26
For each case above, what is the IRR of
the project?
Incremental Cash Flow
Capital budgeting analysis should include only
incremental costs.
• An example…Should Norman Paul pursue
an MBA?
• Norman Paul’s current salary is $60,000 per year and he
expects it to increase at 5% each year.
• Norm pays taxes at flat rate of 35%.
• Sunk costs: $1,000 for GMAT course and $2,000 for
visiting various programs (IGNORE)
• Room and board expenses are not incremental to the
decision to go back to school
27
Incremental Cash Flow
• At end of two years assume that Norm receives a salary offer of
$90,000, which increases at 8% per year
• Expected tuition, fees and textbook expenses for next two years
while studying in MBA: $35,000 for 2 years
• If Norm worked at his current job for two years, his salary would
have increased to $66,150: $60,0001.052  $66,150
• Yr 2 net cash inflow: $90,000 - $66,150 = $23,850
• After-tax inflow: $23,850 x (1-0.35) = $15,503
• Yr 3 cash inflow: $90,0001.08  $60,0001.053  1  0.35  $18,032
• MBA has substantial positive NPV value if 30 yr analysis period


What about Norm’s opportunity cost?
28
Opportunity Costs
Cash flows from alternative investment
opportunities, forgone when one investment is
undertaken.
If Norm did not attend MBA program, he would have
earned:
First year: $60,000 ($39,000
after taxes)
29
Second Year: $63,000
($40,950 after taxes)
NPV of a project could fall substantially if
opportunity costs are recognized!
Capital Rationing
Can a firm accept all investment projects with
positive NPV?
Reasons why a company would not accept all
projects:
Limited availability of skilled personnel to be
involved with all the projects;
Financing may not be available for all projects.
30
Companies are reluctant to issue new shares to
finance new projects because of the negative signal
this action may convey to the market.
Capital Rationing
Capital rationing: project combination that
maximizes shareholder wealth subject to funding
constraints
1. Rank
1. Rank
thethe
projects
projectsusing
using the
the Profitability
Profitability Index
Index
(PI)(PI)
2. Select the investment with the highest PI
3. If funds still available, select the second-highest
PI, and so on, until the capital is exhausted.
31
The steps above helps managers select the
combination of projects with the highest NPV.
Equipment Replacement and
Unequal Lives
• A firm must purchase an electronic control device:
• First alternative is a cheaper device, higher maintenance costs,
shorter period of utilization
• Second device is more expensive, smaller maintenance costs,
longer life span
• Expected cash outflows:
Device
A
B
0
12000
14000
1
1500
1200
2
1500
1200
3
1500
1200
4
1200
• Maintenance costs are constant over time. Use real discount rate
of 7% for NPV
Device
A
B
32
NPV
$15,936
$18,065
Cash outflow device A < cash outflow device B 
select A?
Approach 1: Lowest Common Time
Frame
• Each could be
evaluated on a 12
year time table with
the noted CF’s
• PV of A (@7%
discount rate) is
$48233
• PV of B is $42360
• B is cheaper, in a DCF
context, over time
33
Year
A
B
0
12000
14000
1
1500
1200
2
1500
1200
3
13500
1200
4
1500
15200
5
1500
1200
6
13500
1200
7
1500
1200
8
1500
15200
9
13500
1200
10
1500
1200
11
1500
1200
12
1500
1200
Approach 2: Equivalent Annual
Cost (EAC)
• EAC converts lifetime costs to a level annuity; eliminates the
problem of unequal lives
• 1. Compute NPV for operating devices A and B for their
lifetime:
• NPV device A = $15,936
• NPV device B = $18,065
• 2. Compute annual expenditure to make NPV of annuity
equal to NPV of operating device:
34
Device A
X
X
X
$15,936 


1
2
1.07 1.07
1.07 3
Device B
$18,065 
Y
Y
Y
Y



1.07 1 1.07 2 1.07 3 1.07 4
X  $6,072
Y  $5,333
Calculator Approach (Device A)
•
•
•
•
•
•
•
•
35
P/YR = 1
Enter CF’s
Type 7, press I/YR
Press  NPV
Press +/Press PV
Type 3, press N
Press PMT
Year
CF for A
0
12000
1
1500
2
1500
3
1500
The Human Face of Capital Budgeting
• Managers must be aware of optimistic bias in
these assumptions made by project supporters.
• Companies should have control measures in place
to remove bias:
• Investment analysis should be done by a group
independent of individual or group proposing
the project.
• Project analysts must have a sense of what is
reasonable when forecasting a project’s profit
margin and its growth potential.
• Storytelling: Best analysts not only provide
36
numbers to highlight a good investment, but also
can explain why the investment makes sense.
Cash Flow and Capital Budgeting
Certain types of cash flows are common to many
investments
Opportunity costs should be included in cash flow
projections
Consider human factors in capital budgeting
38
Excess Capacity
• Excess capacity is not a free asset as traditionally
regarded by managers.
• Company has excess capacity in a distribution
center warehouse.
• In two years, the firm will invest $2,000,000 to
expand the warehouse.
• The firm could lease the excess space for
$125,000 per year for the next two years.
• Expansion plans should begin immediately in
this case to hold inventory for stores that will
come on line in a few months.
• Incremental cost: investing $2,000,000 at
present vs. two years from today
• Incremental cash inflow: $125,000
39
Excess Capacity
• NPV of leasing excess capacity (assume 10%
discount rate):
125,000 2,000 ,000
NPV  125,000  2,000 ,000 

 $108,471
2
1.10
1.1
• NPV negative: reject leasing excess capacity at $125,000 per
year.
• The firm could compute the value of the lease that would
allow break even.
X
2,000 ,000
NPV  X  2,000 ,000 

0
2
1.10
1.1
• X = $181,818
• Leasing the excess capacity for a price above $181,818
would increase shareholders wealth.
40
Two Methods of Handling
Depreciation to Compute Cash Flow
Adding
non-cash
expenses
after-tax
profits,today
add backfor
Assume
a firm
purchases aFindfixed
asset
back to after-tax earnings
non-cash charge tax savings
Sales
$30,000
Cost of goods
(10,000)
$30,000
Sales
Cost of goods
$30,000
(10,000)
Plans
to depreciate
using straight-line
Gross profits
$20,000 over 3 years
Pre-tax income
$20,000
method
Depreciation
(10,000)
Taxes (40%)
(8,000)
Pre-tax income
$10,000
Firm(40%)
will produce(4,000)
Taxes
10,000 units/year
41
Net income
$6,000
Cash flow
= NI + deprec
$16,000
Aft-tax income
$12,000
Depreciation
tax savings
$4,000
Cash Flow
$16,000
Costs $1/unit
Sells for $3/unit
and
most common
technique:
Firm pays taxes at Simplest
a
40%
marginal
rate
Add depreciation back in.
The Initial Investment
• Initial cash flows:
• Cash outflow to acquire/install fixed assets
• Cash inflow from selling old equipment
• Cash inflow (outflow) if selling old equipment
below (above) tax basis generates tax
savings (liability)
An example....
Tax rate = 40%
42
New equipment costs $10 million,
$0.5 million to install
Old equipment fully depreciated,
sold for $1 million
Initial investment: outflow of $10.5 million, and
after-tax inflow of $0.60 million from selling the
old equipment
Working Capital Expenditures
• Many capital investments require additions to
working capital.
• Net working capital (NWC) = current assets –
current liabilities.
• Increase in NWC is a cash outflow; decrease a
cash inflow.
• An example…
•
•
•
•
Operate booth from November 1 to January 31
Order $15,000 calendars on credit, delivery by Nov 1
Must pay suppliers $5,000/month, beginning Dec 1
Expect to sell 30% of inventory (for cash) in Nov; 60%
in Dec; 10% in Jan
• Always want to have $500 cash on hand
43
Working Capital for Calendar
Sales Booth
Oct 1
Nov 1
Dec 1
Jan 1
Feb 1
Cash
$0
$500
$500
$500
$0
Inventory
0
15,000
10,500
1,500
0
Accts payable
0
15,000
10,000
5,000
0
Net WC
0
500
1,000
(3,000)
0
NA
+500
+500
(4,000)
+3,000
Monthly  in WC
Payments and
inventory
44
Oct 1 to
Nov 1
Nov 1 to
Dec 1
Dec 1 to
Jan 1
Jan 1 to
Feb 1
Reduction in
inventory
$0
$4,500
[30%]
$9,000
[60%]
$1,500
[10%]
Payments
$0
($5,000)
($5,000)
($5,000)
($500)
($500)
+$4,000
($3,000)
Net cash flow
Terminal Value
Terminal value is used when evaluating an
investment with indefinite life-span:
Construct cash-flow
forecasts for 5 to 10
years
Forecasts more than 5 to
10 years have high
margin of error; use
terminal value instead.
• Terminal value is intended to reflect the value of
a project at a given future point in time.
• Large value relative to all the other cash flows
of the project.
45
Terminal Value
Different ways to calculate terminal values:
• Use final year cash flow projections and assume that
all future cash flow grow at a constant rate;
• Multiply final cash flow estimate by a market multiple, or
• Use investment’s book value or liquidation value.
JDS Uniphase cash flow projections for acquisition of
SDL Inc.
Year 1
$0.5 Billion
46
Year 2
$1.0 Billion
Year 3
$1.75 Billion
Year 4
$2.5 Billion
Year 5
$3.25 Billion
Terminal Value of SDL Acquisition
• Assume that cash flow continues to grow at 5% per
year (g = 5%, r = 10%, cash flow for year 6 is $3.41
billion):
CF
$3.41
PVt 
t 1
r g
, or PV5 
0.10  0.05
 $68.2
• Terminal value is $68.2 billion; value of entire project is:
$0.5
$1
$1.75 $2.5 $3.25 $68 .2





 $48 .67
1
2
3
4
5
5
1.1
1.1
1.1
1.1
1.1
1.1
• $42.4 billion of total $48.7 billion from terminal value
47
• Using price-to-cash-flow ratio of 20 for companies in the
same industry as SDL to compute terminal value
• Terminal Value = $3.25 x 20 = $65 billion
• Caveat : market multiples fluctuate over time
Initial Investment for Jazz CD
Project
Classicaltunes.com is considering adding jazz
recordings to its offerings.
• Firm uses 10% discount rate to calculate NPV and 40%
tax rate.
• The average selling price of Classicaltunes CD’s is
$13.50; price is expected to increase at 2% per year.
• Sales expected to begin when new fiscal year begins.
$50,000 for computer equipment (MACRS 5year)
Initial
investment
transactions:
$4,500 for inventory ($2,500 of which
purchased on credit)
$1,000 increase in cash balances
48
Projections for Jazz CD Proposal
Abbreviated Project Balance Sheet
0
1
2
3
4
Year
0
1
2
3
4
Year
Annual
Estimates
Cash
1000
2000for Classicaltunes.com
2500
3000
3200
$13.77
Price perCash
unit Flow$13.50
$14.05
$14.33
$14.61
Year
Accounts
Units
Receivable
New Fixed
Assets
Inventory
0
1
2
3
4
0
4,000
10,000
16,000
22,000
0 4590 11705 19102
26790
-50000 -10000
-5000 -25000 -40000
4500
7344 Project
18727 Income
30563Statement
42864
Abbreviated
Change
in
Current
Revenue
0
5500
-3000
working
capital
Assets
Cost of goods
0
Gross
P&E
50000
sold
Operating cash
4000
Accumulated
Gross profit
0
flow
10000
Depreciation
SG&A
Net
cash flow
-49000
0
Net
P&E
40000
Expense
Total
assets
45500
Depreciation
10000
49
Pretax profit
Accounts
Payable
55080
13934
32932
52665
72855
-6614 140454
-12302 229221
-12771 321482
-12953
5
5
6
6
3300
3500
$14.91
$15.20
5
6
24,000
25,000
29810
31673
-15000 -10000
47696
50677
357722
80806
-5109
380080
85851
-3291
41861 105341
234682 145000
259349 155000
273657
60000
65000 169623
90000 130000
10174
14790 23591 40411
47644
48454
13219 41800
35114 56080
59597 79952
86800 105160
98374 123672
106422
28000
-6440
-2512 -14180 -12542
27535
35163
8262 23200
19664 33920
29799 50048
35363 39840
35772 31328
38008
32000
45934
18000
-10000 -13043
2500 4320
56132
13800 86585
14280 122903
23872 120646
25208 117179
18512
1649 15519
11016 17978
27565
25214
37393
28057
49903
29810
Year Zero Cash Flow
• Initial cash outlay of $50,000 for computer equipment
• Half-year of MACRS depreciation can be taken in year zero:
• 20% x $50,000 = $10,000; non cash expense
• Depreciation expense are deducted from the firm’s classicalmusic CD profits. Savings of $4,000 (40% x $10,000) in taxes
• Changes in working capital are result of following
transactions:
• Purchase of $4,500 in inventory and $1000 cash balance
• Accounts payable of $2,500 partially finance the $5,500 outlay
Net Cash Flow:
Increase in gross fixed assets
Change in working capital
50
- $50,000
- $3,000
Operating cash inflow
+ $4,000
Net cash flow
- $49,000
Year One Cash Flow
• Purchase of additional $10,000 in fixed assets
• 2nd year depreciation expenses for MACRS 5-year asset
class is 32%. An additional 20% depreciation deduction for
assets purchased this year
• 32% x $50,000 + 20% x $10,000= $18,000
• Non cash expense; has to be added back when computing cash
flow for the year
• Net working capital for year one is:
• NWC = Current Assets – Current Liabilities = $13,934 - $4,320 =
$9,614
NWC NWCyear1 – NWCyear 0  $9,614 $3,000  $6,614
• Increase in NWC; cash outflow of $6,614
51
Year One Cash Flow
• Pretax loss of $13,043 in year 1 of Jazz CD project generates
tax savings for other operations of Classicaltunes.com.
• Tax savings = 40% x $13,043 = $5,217
• Net operating cash inflow = pretax loss + tax savings +
depreciation
• Operating cash inflow = -$13,043 + $5,217 + $18,000 = $10,174
Net Cash Flow:
Increase in gross fixed assets
Change in working capital
Operating cash inflow
Net cash flow
52
- $10,000
- $6,614
+ $10,174
- $6,440
Year Two Cash Flow
53
• Purchase of additional $5,000 in fixed assets
• Assets purchased at the onset of the project have allowable
depreciation of 19.2% (19.2% x $50,000 = $9,600)
• An additional 32% depreciation deduction for assets purchased in
year 1 and 20% depreciation of assets purchased this year
• Total depreciation = $9,600 + 32% x $10,000 + 20% x $5,000=
$4,200 = $13,800
• Changes in working capital are result of following
transactions:
• Increases in current assets:
• $500 increase in cash balance
• $7,115 increase in accounts receivables
• $11,383 increase in inventory
• Increase in current liabilities:
• $6,696 increase in account payables
• Change in NWC = $18,998 - $6,696 = $12,302 (cash outflow)
Year Two Cash Flow
• Pretax profit in year two is $1,649.
• The company must pay taxes of $660 (40% x $1,649-- cash
outflow.
• Net operating cash inflow = pretax profit + tax + depreciation
• Operating cash inflow = $1,649 - $660 + $13,800 = $14,789
Net Cash Flow:
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Increase in gross fixed assets
- $5,000
Change in working capital
- $12,302
Operating cash inflow
+$14,790
Net cash flow
- $2,512
Terminal Value for Jazz CD
Investment
• If we assume that cash flow continue to grow at 2% per
year (g = 2%, r = 10%,):
CFt 1  1 g   CFt  1.02 $35,163  $35,866
CFt 1
$35,866
PVt 
, or PV6 
 $448,325
rg
0.10  0.02
• Second approach used by Classicaltunes.com to compute
terminal value for the project: use the book value at end of year
six:
• Plant and Equipment (P&E) at end of year six is $31,328.
• The firm liquidates total current assets and pays off current
debts:
• $85,850 - $29,810 = $56,040
• Terminal value = $31,328 + $56,040 = $87,368.
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NPV for Jazz CD Project
• Using assumption that cash flow grow at a steady rate
past year 6:
$6,440 $2,513 $14,180 $12,562




1
2
3
4
1.1
1.1
1.1
1.1
$27,535 $35,163 $448,325



 $213,862
5
6
6
1.1
1.1
1.1
NPV  $49,000
• Using book value assumption for terminal value:
$6,440 $2,513 $14,180 $12,562
NPV  $49,000




1
2
3
4
1.1
1.1
1.1
1.1
$27,535 $35,163 $87,368



 $10,111
5
6
6
1.1
1.1
1.1
• NPV is positive with both methods: investing in Jazz CD
project increases shareholders wealth.
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