The East Tacoma works case : Evaluation of the relevant cash flows (in K$)
Analysis at “ initial investment stage”
31/12/94
Cost of crane purchase
Modification of plant
Shipping, installation, testing
Cash inflows from sales of old trucks
Tax reduction due to loss made on trucks sale
Cash flow
Selling the six trucks…
Does the sale have to be factored in ?
How does it impact Cash Flow ?
1
The sale of six trucks must be considered…
Does the sale has to be factored in ?
Yes as if we do not buy the crane, we do not sell the
trucks
How does it impact Cash Flow ?
Proceeds of sales ($25,000)
Tax consideration. Here there is a loss on sales of
assets.
Sales – Net Book Value = $25,000 – (70,000 $ -
22,000 $) = -23,000 $
Accounting profit will be lower => less tax
Less tax payment = 23,000 $ *35%= 8,050 $
The East Tacoma works case : Evaluation of the relevant cash flows (in K$)
Analysis at “ initial investment stage”
31/12/94
Cost of crane purchase -850
Modification of plant -130
Shipping, installation, testing -20
Cash inflows from sales of old trucks 25
Tax reduction due to loss made on trucks sale 8,05
Cash flow - 966, 95
2
The East Tacoma Works case : “business as usual stage”
Cash flow savings stemming from method change – Cash related items only
1 2 3 4 5 6 7 8
Man power
Maintenance
(Man power)
Maintenance
(other)
Propane
Insurance
Total savings
Calculating the operational CF savings as we give up
the old method
Man power : 12 * $10 * 2,080 = $ 249,600
Maintenance (man power) : 3 * $8 * 2080 = $ 49,920
Maintenance (other) : $ 5,000
Propane : $3,600 * 6 = $ 21,600
Insurance : $ 12,000
Total yearly CF savings = $ 338 120
3
The East Tacoma Works case : “business as usual stage”
Cash flow savings stemming from method change – Cash related items only
1 2 3 4 5 6 7 8
Man power 249600 249600 249600 249600 249600 249600 249600 249600
Maintenance
(Man power) 49920 49920 49920 49920 49920 49920 49920 49920
Maintenance
(other) 5000 5000 5000 5000 5000 5000 5000 5000
Propane 21600 21600 21600 21600 21600 21600 21600 21600
Insurance 12000 12000 12000 12000 12000 12000 12000 12000
Total savings
338120 338120 338120 338120 338120 338120 338120 338120
Calculating the operational CF required for the new
crane
Man power : 2 * $17 * 2,080 = $ 70,720
Maintenance : $ 12,000
Other expenses : $ 6,000
Total yearly CF new requirement = $ 88,720
4
The East Tacoma Works case : “business as usual stage”
New expenses stemming from method change – Cash related items only
1 2 3 4 5 6 7 8
Man power
Maintenance
contract
Other
Total cash
outflow
The East Tacoma Works case : “business as usual stage”
New expenses stemming from method change – Cash related items only
1 2 3 4 5 6 7 8
Man power 70720 70720 70720 70720 70720 70720 70720 70720
Maintenance
12000 12000 12000 12000 12000 12000 12000 12000
contract
Other 6000 6000 6000 6000 6000 6000 6000 6000
Total cash
88 720 88 720 88 720 88 720 88 720 88 720 88 720 88 720
outflow
5
The East Tacoma Works case : “business as usual stage”
1 2 3 4 5 6 7 8
Savings
New expenses
Total
incremental CF
Depreciation
(reduction)
Depreciation
(new)
Total
incremental
EBIT
The East Tacoma Works case : “business as usual stage”
1 2 3 4 5 6 7 8
Savings 338120 338120 338120 338120 338120 338120 338120 338120
New expenses -88720 -88720 -88720 -88720 -88720 -88720 -88720 -88720
Total
249400 249400 249400 249400 249400 249400 249400 249400
incremental CF
Depreciation
(reduction)
Depreciation
(new)
Total
incremental
EBIT
6
How does the project impact depreciation expenses ?
Depreciation is not a cash item
Yet it indirectly affects the calculation and the
payement of taxes
The former trucks are no longer depreciated (the NBV
was $ 48,000. We « save » these depreciation expenses
worth $ 8000 over the first six years of the project
The crane must be depreciated using the MACRS
method
Income Tax Considerations
The maximum depreciation currently allowed by tax
law is computed using the modified accelerated cost
recovery system (MACRS). The rate of depreciation
depends on the class life of the asset and the period
in which we are calculating depreciation. There are
currently six categories for property, excluding real
estate. They are 3-year, 5-year, 7-year, 10-year, 15-
year, and 20-year property.
8-14
7
Income Tax Considerations
Here are the tax rates for 5-year and 7-year property:
5-Year 7-Year
Year Property % Property %
1 20.00% 14.29%
2 32.00% 24.49%
3 19.20% 17.49%
4 11.52% 12.49%
5 11.52% 8.93%
6 5.76% 8.92%
7 8.93%
8 4.46%
100.00% 100.00%
The crane is classified as 7-year property and calculate
depreciation for our tax return.
8-15
Income Tax Considerations
Here are the tax rates for 5-year and 7-year property:
5-Year 7-Year
The gross value of the crane is $
Year Property % Property %
1,000,000
1 20.00% 14.29%
2 32.00% 24.49% First year : 14,29% * 1,000,000
3 19.20% 17.49% Second year : 24,49% * 1,000,000
4 11.52% 12.49%
Etc…
5 11.52% 8.93%
6 5.76% 8.92%
7 8.93%
8 4.46%
100.00% 100.00%
The crane is classified as 7-year property and calculate
depreciation for our tax return.
8-16
8
The East Tacoma Works case : “business as usual stage”
1 2 3 4 5 6 7 8
Savings 338120 338120 338120 338120 338120 338120 338120 338120
New expenses -88720 -88720 -88720 -88720 -88720 -88720 -88720 -88720
Total
249400 249400 249400 249400 249400 249400 249400 249400
incremental CF
Depreciation
8000 8000 8000 8000 8000 8000
(reduction)
Depreciation
-142900 -244900 -174900 -124900 -89300 -89300 -89300 -44500
(new)
Total
incremental 114500 12500 82500 132500 168100 168100 160100 204900
EBIT
The East Tacoma Works case : “business as usual stage”
1 2 3 4 5 6 7 8
Total
incremental
EBIT
variation
Incremental
Tax
Incremental
NOPAT
Incremental
CF from
operations
9
The East Tacoma Works case : “business as usual stage”
1 2 3 4 5 6 7 8
Total
incremental
114 500 12 500 82 500 132 500 168 100 168 100 160 100 204 900
EBIT
variation
Incremental
-40 075 -4 375 -28 875 -46 375 -58 835 -58 835 -56 035 -71 715
Tax
Incremental
74 425 8 125 53 625 86 125 109 265 109 265 104 065 133 185
NOPAT
Incremental CF
209 325 245 025 220 525 203 025 190 565 190 565 193 365 177 685
from operations
The East Tacoma Works case : “business as usual stage”
1 2 3 4 5 6 7 8
Incremental
74 425 8 125 53 625 86 125 109 265 109 265 104 065 133 185
NOPAT
Incremental
depreciation -134 900 -236 900 -166 900 -116 900 -81 300 -81 300 -89 300 -44 500
expenses
Incremental CF
209 325 245 025 220 525 203 025 190 565 190 565 193 365 177 685
from operations
10
The East Tacoma Works case : “business as usual stage”
0 1 2 3 4 5 6 7 8
Incremental
CF from
operations
CF from
initial
investment
IRR
Pay back ratio
NPV 12%
(I+NPV)/I
The East Tacoma Works case : “business as usual stage”
0 1 2 3 4 5 6 7 8
Incremental
209
CF from 245 025 220 525 203 025 190 565 190 565 193 365 177 685
325
operations
CF from
- 966
initial
950
investment
IRR 13,99%
Pay back ratio 4,5 ans
NPV 12% 65,18 (K)
(I+NPV)/I 1,065
11
