1

Learning Outcomes

1. Find the components of the initial investment (I0)

2. Calculate the net cash flows
3. Calculate NPV

2
OUTLINE

1. Basic Principles of Capital Budgeting

2. Practice problems

3
Basic Principles of Capital
Budgeting

4
1. Decisions are based on cash flows

The decisions are not based on accounting concepts, such as net income.
Furthermore, intangible costs and benefits are often ignored because, if they
are real, they should result in cash flows at some other time (example :
depreciation; increase in the market value of assets)

5
2. Capital budgeting cash flows are not
accounting net income.

Accounting net income is reduced by noncash charges such as

accounting depreciation. Furthermore, to reflect the cost of debt
financing, interest expenses are also subtracted from accounting
net income. (No subtraction is made for the cost of equity
financing in arriving at accounting net income.)

3. Cash flows are analyzed on an after-tax basis:

Taxes must be fully reflected in all capital budgeting decisions.

6
 4. Financing costs are ignored in the cash flow
calculation process.
This may seem unrealistic, but it is not. Most of the time, analysts want to
know the after-tax operating cash flows that result from a capital
investment. Then, these after-tax cash flows and the investment outlays are
discounted at the “required rate of return” to find the net present value
(NPV).

Financing costs are reflected in the required rate of return. If we included

financing costs in the cash flows and in the discount rate, we would be
double-counting the financing costs. So even though a project may be
financed with some combination of debt and equity, we ignore these costs,
focusing on the operating cash flows and capturing the costs of debt (and
other capital) in the discount rate.

7
5. Timing of cash flows is crucial.

Analysts make an extraordinary effort to detail precisely when cash flows

occur.

8
 6. Cash flows are based on incremental cash
flows and opportunity costs:
What are the incremental cash flows that occur with an investment compared to
what they would have been without the investment?

Example: If you replace an old machine with a new one,

What is the opportunity cost?
the cash flows the old machine would generate,
What is the incremental cash flow?
the cash flow with a decision (replace) minus the cash flow without that decision
(not replace, which is equal to the opportunity cast in this case)
Therefore, If opportunity costs are correctly assessed, the incremental cash flows
provide a sound basis for capital budgeting.

9
6. Cash flows are based on incremental cash
flows and opportunity costs:
• An incremental cash flow is the cash flow that is realized because of a
decision: the cash flow with a decision minus the cash flow without that
decision.

10
What is an opportunity cost?
• An opportunity cost is what a resource is worth in its next-best
use. For example, if a company uses some idle property, what
should it record as the investment outlay: the purchase price
several years ago, the current market value, or nothing?

If you replace an old machine with a new one, what is the

opportunity cost?

If you invest $10 million, what is the opportunity cost?

11
What is an opportunity cost?

The answers to these three questions are, respectively:

the current market value,

the cash flows the old machine would generate,
and $10 million (which you could invest elsewhere).

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7. Externalities !

Externalities ( ex: impact on the current sales) should be taken into account.

Externalities are the effects the acceptance of a project may have on other
firm cash flows. The primary one is a negative externality called
cannibalization, which occurs when a new project takes sales from an
existing product.

When considering externalities, the full implication of the new project

(loss in sales of existing products) should be taken into account.

13
7. Externalities !

An example of cannibalization is when a soft drink company

introduces a diet version of an existing beverage. The analyst
should subtract the lost sales of the existing beverage from the
expected new sales of the diet version when estimated
incremental project cash flows.

A positive externality exists when doing the project would

have a positive effect on sales of a firm’s other product lines.

14
8. Sunk costs should not be included in the
analysis:

They are costs that cannot be avoided, even if the project is not
undertaken. Because these costs are not affected by the
accept/reject decision, they should not be included in the
analysis.

An example of a sunk cost is a consulting fee paid to a

marketing research firm to estimate demand for a new product
prior to a decision on the project.

15
Practice Problems

16
 Problem 1
Duration: 5 years
Initial investment amount:
• Land : 100,000 TND, salvage value (selling price at the end of the project life):
annual growth rate equal to 5%
• Building: 150,000 TND (Totally depreciable; Depreciation: Straight line
method: useful life : 20 years), salvage value (selling price at the end of the
project life) : 120,000 TND.
• Truck : 80,000 TND (Totally depreciable; Depreciation: Straight line method:
useful life : 10 years), salvage value (selling price at the end of the project life) :
20,000 TND.
• Industrial Equipment: 50,000 TND (Totally depreciable; Depreciation: Straight
line method: useful life : 10 years), salvage value (selling price at the end of the
project life): : 25,000 TND.
• Net Working Capital: 30,000 TND

17
Problem 1
Annual sales:
• Quantity : 50,000
• Unit price: 3 TND

Annual costs except depreciation and amortization :

• Variable costs: 1TND
• Annual fixed operating cost except D&A: 40,000 TND

WACC : 10% (the project has the same risk as the whole company)

Tax rate: 30%

Q: Compute the project NPV

18
Solution

I0 = Land + Building + Truck + Industrial equipment + Net

working capital
=100,000 + 150,000 + 80,000 + 50,000 + 30,000 = 410,000
TND

19
 Solution
end Y1 end Y2 end Y3 end Y4 end Y5
Sales = (unit price x quant.) 150000 150000 150000 150000 150000
- Variable cost = (unit cost x quant.) 50000 50000 50000 50000 50000
- Fixed operating cost except D&A 40000 40000 40000 40000 40000
- Depreciation and amort. 20500 20500 20500 20500 20500
= Operating income 39500 39500 39500 39500 39500
- Taxes on operating income 11850 11850 11850 11850 11850
= Operating income after tax 27650 27650 27650 27650 27650
+ Add back depreciation 20500 20500 20500 20500 20500
+ Total salvage value 292628.156
- Tax loss on LT assets 10358.45
+ Tax benefit on LT assets 6000
+ Recovery of Net Working Capital 30000
= Project net cash flows 48150 48150 48150 48150 366419.71
20
Solution : Explanation

Land :
• Salvage value = 100,000 (1.05)5 = 127,628.156
• Depreciation : land  No depreciation
• Salvage value > Book value at the end of the project
• Tax loss from the long term asset = 30% (127,628.156 –
100,000) = 8,288.447 TND

21
 Solution : Explanation

Building :
Annual depreciation= 150,000/20 = 7,500 TND
Accumulated depreciation over the project duration= 7,500 x 5 =
37,500 TND
book value at the end of the project = 150,000 – 37,500 = 112,500
TND
 book value at the end of the project < salvage value (120,000)
Tax loss from the long term asset = 0.3 x (120,000 -112,500) =
2,250 TND

22
Solution : Explanation

Truck :
Annual depreciation= 80,000/10 = 8,000 TND
Accumulated depreciation over the project duration= 8,000 x
5 = 40,000 TND
book value at the end of the project = 80,000 – 40,000 =
40,000 TND
book value at the end of the project > salvage value (20,000)
Tax benefit from the long term asset = 0.3 x (40,000 - 20,000)
= 6,000 TND

23
Solution : Explanation

Industrial equipment :
Annual depreciation= 50,000/10 = 5,000 TND
Accumulated depreciation over the project duration= 5,000 x
5 = 25,000 TND
book value at the end of the project = 50,000 – 25,000 =
25,000 TND
book value at the end of the project = salvage value (25,000)
No tax effect !

24
Solution : Explanation
• Annual depreciation = 7,500 + 8,000 + 5,000 = 20,500 TND

• Total salvage value = 100,000(1,05) + 120,000 + 20,000 +

5
25,000 = 292,628.156 TND

25
Solution : Explanation

26
Remarks !
NB: For determining the terminal cash flow, we should take into account the
salvage value of the long term assets, the recovery of the net working capital
and the tax benefit/loss from the long term assets.
NB: For determining the tax benefit or loss, a benefit is received if the book
value of the asset is more than the salvage value, and a tax loss is recorded if
the book value of the asset is less than the salvage value.
NB: The timing of cash flows is important. Capital budgeting decisions account
for the time value of money, which means that cash flows received earlier are
worth more than cash flows to be received later.

27
Remarks !
NB: Cash flows are analyzed on an after-tax basis. The impact of
taxes must be considered when analyzing all capital budgeting
projects. Firm value is based on cash flows they get to keep, not those
they send to the government.

NB: Financing costs are reflected in the project's required rate of

return. Do not consider financing costs specific to the project when
estimating incremental cash flows. The discount rate used in the
capital budgeting analysis (WACC) takes account of the firm's cost of
capital. Only projects that are expected to return more than the cost of
the capital needed to fund them will increase the value of the firm.

28
Problem 2
Duration: 5 years
Initial investment amount:
• Land : 140,000 TND, salvage value (selling price at the end of the project
life): annual growth rate : 6%
• Building: 130,000 TND (Totally depreciable; Depreciation: Straight line
method: useful life : 20 years), salvage value (selling price at the end of
the project life) : 90,000 TND.
• Industrial Equipment: 70,000 TND (Totally depreciable; Depreciation:
Straight line method: useful life : 10 years), salvage value (selling price at
the end of the project life) : 40,000 TND.
• Net Working Capital: 40,000 TND
Problem 2
Annual sales:
• Quantity : 80,000
• Unit price: 4 TND

Annual costs except depreciation and amortization :

• Variable costs: 2TND
• Annual fixed operating cost except D&A: 75,000 TND

WACC : 10%
The project risk being higher than the whole company, the top management decided to use a
discounting rate = 12%
Tax rate: 30%

Q: Compute the project NPV

Solution

I0 = Land + Building + Industrial equipment + Net working

capital
=140,000 + 130,000 + 70,000 + 40,000 = 380,000 TND
 Solution
Cash flows analysis :
end Y1 end Y2 end Y3 end Y4 end Y5
Sales = (unit price x quant.) 320000 320000 320000 320000 320000

- Variable cost = (unit cost x quant.) 160000 160000 160000 160000 160000

- Fixed operating cost except D&A 75000 75000 75000 75000 75000

- Depreciation and amort. 13500 13500 13500 13500 13500

= Operating income 71500 71500 71500 71500 71500

- Taxes on operating income 21450 21450 21450 21450 21450

= Operating income after tax 50050 50050 50050 50050 50050

+ Add back depreciation 13500 13500 13500 13500 13500

+ Total salvage value 317351.581

- Tax loss on LT assets 15705.474

+ Tax benefit on LT assets 2250

+ Recovery of Net Working Capital 40000

= Project net cash flows 63550 63550 63550 63550 407446.11

Solution : Explanation
Depreciation and Amortization :
Building :
Annual depreciation= 130,000/20 = 6,500 TND
Accumulated depreciation over the project duration= 6,500 x 5
= 32,500 TND
book value at the end of the project = 130,000 – 32,500 = 97,500
TND
book value at the end of the project > salvage value (90,000)
Tax benefit from the long term asset = 0.3 x (97,500 -90,000) =
2,250 TND
Solution : Explanation

Industrial equipment :
Annual depreciation= 70,000/10 = 7,000 TND
Accumulated depreciation over the project duration= 7,000 x
5 = 35,000 TND
book value at the end of the project = 70,000 – 35,000 =
35,000 TND
book value at the end of the project < salvage value (40,000)
Tax loss from the long term asset = 0.3 x (40,000 -35,000) =
1,500 TND
Solution : Explanation

Land :
• Salvage value = 140,000 (1.06)5 = 187,351.581
• Depreciation : land No depreciation
• Salvage value > Book value at the end of the project
• Tax loss from the long term asset = 30% (187,351.581 –
140,000) = 14,205.474 TND

Annual depreciation = 7,000 + 6,500 = 13,500 TND

Total salvage value = 187,351.581 + 90,000 + 40,000 =

317,351.581 TND
Solution : Explanation
• The NPV is the sum of the present values of all the expected
incremental cash flows if a project is undertaken. The discount
rate used is the firm's cost of capital, adjusted for the risk level
of the project.

407446.11

44219.414

NPV ≥ 0 ACCEPT
 Problem 3
Duration: 5 years
Initial investment amount:
• Land : 140,000 TND, salvage value (selling price at the end of the project
life): annual growth rate : 6%
• Building: 130,000 TND (Totally depreciable; Depreciation: Straight line
method: useful life : 20 years), salvage value (selling price at the end of the
project life) : 90,000 TND.
• Industrial Equipment: 70,000 TND (Totally depreciable; Depreciation:
Straight line method: useful life : 10 years), salvage value (selling price at
the end of the project life) : 40,000 TND.
• Net Working Capital: 30 days of sales
Problem 3
Sales:
• Quantity : 60,000 for year 1 with an annual growth rate of 5%
• Unit price: 4 TND

Annual costs except depreciation and amortization :

• Variable costs: 2TND
• Annual fixed operating cost except D&A: 75,000 TND

WACC : 11%(the project has the same risk as the whole company)

Tax rate: 30%

Q: Compute the project NPV

Solution

I0 = Land + Building + Industrial equipment + Net working

capital
=140,000 + 130,000 + 70,000 + [(60000x4)(30/360)] = 360,000
TND

20,000
Solution
Cash flows analysis :
end Y1 end Y2 end Y3 end Y4 end Y5
Sales = (unit price x quant.) 240000 252000 264600 277830 291721.5
- Variable cost = (unit cost x quant.) 120000 126000 132300 138915 145860.75
- Fixed operating cost except D&A 75000 75000 75000 75000 75000
- Depreciation and amort. 13500 13500 13500 13500 13500
= Net Operating income 31500 37500 43800 50415 57360.75
- Taxes on operating income 9450 11250 13140 15124.5 17208.225
= Net Operating income after tax 22050 26250 30660 35290.5 40152.525
+ Add back depreciation 13500 13500 13500 13500 13500
+ Total salvage value 317351.581
- Tax loss on LT assets 15705.474
+ Tax benefit on LT assets 2250
-Added NWC 1000 1050 1102.5 1157.625
+ Recovery of Net Working Capital 24310.125
= Project net cash flows 34550 38700 43057.5 47632.88 381858.76
Solution : Explanation

Depreciation and Amortization :

Building :
Annual depreciation= 130,000/20 = 6,500 TND
Accumulated depreciation over the project duration= 6,500 x 5 =
32,500 TND
book value at the end of the project = 130,000 – 32,500 = 97,500
TND
book value at the end of the project > salvage value (90,000)
Tax benefit from the long term asset = 0.3 x (97,500 -90,000) =
2,250 TND
Solution : Explanation

Industrial equipment :
Annual depreciation= 70,000/10 = 7,000 TND
Accumulated depreciation over the project duration= 7,000 x
5 = 35,000 TND
book value at the end of the project = 70,000 – 35,000 =
35,000 TND
book value at the end of the project < salvage value (40,000)
Tax loss from the long term asset = 0.3 x (40,000 -35,000) =
1,500 TND
Solution : Explanation

Land :
• Salvage value = 140,000 (1.06)5 = 187,351.581
• Depreciation : land No depreciation
• Salvage value > Book value at the end of the project
• Tax loss from the long term asset = 30% (187,351.581 –
140,000) = 14,205.474 TND
Solution : Explanation
• Annual depreciation = 7,000 + 6,500 = 13,500 TND

• Total salvage value = 187,351.581 + 90,000 + 40,000 =

317,351.581 TND
 Solution : Explanation
Annual added net working capital:
The added net working capital = corresponding sales (30/360)

The change in NWC should be taken into account at the end of

the year preceding the considered annual sales: the added NWC
is necessary to reach this corresponding sales amount.

end Y0 end Y1 end Y2 end Y3 end Y4 end Y5

Sales = (unit price x
quant.) 240000 252000 264600 277830 291721,5
Corresponding NWC 20000 21000 22050 23152,5 24310,125
Investments in NWC 20000 1000 1050 1102,5 1157,625
Included in I0
Solution : Explanation

381,858.76

$-7,988.97

NPV < 0 Refuse

 Problem 4
Duration: 5 years
Initial investment amount:
• Land : 80,000 TND, salvage value (selling price at the end of the project life): annual
growth rate : 4%
• Building: 100,000 TND (Totally depreciable; Depreciation: Straight line method: useful
life : 20 years), salvage value (selling price at the end of the project life) : 80,000 TND.
• Industrial Equipment: 70,000 TND (Totally depreciable; Depreciation: Straight line
method: useful life : 10 years), salvage value (selling price at the end of the project life) :
30,000 TND.
• Net Working Capital: 50 days of sales

Additional investments:
The company will purchase a truck at the beginning of the third year: Purchas. price :
30,000 (Totally depreciable; Depreciation: Straight line method: useful life : 5 years),
salvage value (selling price at the end of the project life) : 20,000 TND.
Problem 4
Sales:
• Quantity : 70,000 for year 1 with an annual growth rate of 6% during the second year and
of 12% during the following years
• Unit price: 3 TND

Annual costs except depreciation and amortization :

• Variable costs: 1.2 TND
• Annual fixed operating cost except D&A: 80,000 TND

WACC : 15%(the project has the same risk as the whole company)

Tax rate: 30%

Q: Compute the project NPV

Solution

Solution:
Initial investment amount:
I0 = Land + Building + Industrial equipment + Net working
capital
= 80,000 + 100,000 + 70,000 + [(70,000x3)(50/360)] =
279,166.667 TND

29,166.667
Solution
Cash flows analysis :
End Y1 End Y2 End Y3 End Y4 End Y5
Sales = (unit price x quant.) 210000 222600 249312 279229 312736.973
- Variable cost = (unit cost x
quant.) 84000 89040 99724.8 111692 125094.789
- Fixed operating cost except
D&A 80000 80000 80000 80000 80000
- Depreciation and amort. 12000 12000 18000 18000 18000
= Operating income 34000 41560 51587.2 69537.7 89642.1837
- Taxes on operating income 10200 12468 15476.2 20861,3 26892.6551
= Operating income after tax 23800 29092 36111 48676.4 62749.5286
+ Add back depreciation 12000 12000 18000 18000 18000
+ Total salvage value 227332.232
- Tax loss on LT assets 9099.6697
+ Tax benefit on LT assets 1500
- Additional investment 30000
- Added NWC 1750 3710 4155.2 4653.82
+ Recovery of Net Working
Capital 43435.7
= Project net cash flows 34050 7382 49955.8 62022.5 343917.791
Solution : Explanation
Depreciation and Amortization :
Building :
Annual depreciation= 100,000/20 = 5,000 TND
Accumulated depreciation over the project duration= 5,000 x
5 = 25,000 TND
book value at the end of the project = 100,000 – 25,000 =
75,000 TND
book value at the end of the project < salvage value
(80,000)
Tax loss from the long term asset = 0.3 x (80,000 -75,000) =
1,500 TND
Solution : Explanation

Industrial equipment :
Annual depreciation= 70,000/10 = 7,000 TND
Accumulated depreciation over the project duration= 7,000 x 5 =
35,000 TND
book value at the end of the project = 70,000 – 35,000 = 35,000
TND
book value at the end of the project > salvage value (30,000)
Tax benefit from the long term asset = 0.3 x (35,000 -30,000)
= 1,500 TND
Solution : Explanation

Land :
• Salvage value = 80,000 (1.04)5 = 97,332.232
• Depreciation : land No depreciation
• Salvage value > Book value at the end of the project
• Tax loss from the long term asset = 30% (97,332.232 – 80,000)
= 5,199.669 TND
Solution : Explanation

Truck: to be acquired at the beginning of the 3rd year:

Annual depreciation= 30,000/5 = 6,000 TND
Accumulated depreciation over the project duration= 6,000 x 3 =
18,000 TND
book value at the end of the project = 30,000 – 18,000 = 12,000
TND
book value at the end of the project < salvage value (20,000)
Tax loss from the long term asset = 0.3 x (20,000 -12,000) =
2,400 TND
Solution : Explanation
• Year 1 and 2:
Annual depreciation = 5,000 + 7,000 = 12,000 TND

Year 3, 4 and 5:
Annual depreciation = 5,000 + 7,000 + 6,000 = 18,000 TND

• Total salvage value = 97,332.232 + 30,000 + 80,000 + 20,000 =

227,332.232 TND
Solution : Explanation
Annual added net working capital:
The added net working capital = corresponding sales (50/360)

The change in NWC should be taken into account at the end of the year
preceding the considered annual sales: the added NWC is necessary
to reach this corresponding sales amount.

End Y1 End Y2 End Y3 End Y4 End Y5

Sales = (unit
price x
quant.) 210000 222600 249312 279229 312737
Correspondi
ng NWC 29166.6667 30916.7 34626.7 38781.9 43435.7
Change in
NWC 29166.6667 1750 3710 4155.2 4653.82

Included in I0
Solution : Explanation

NPV < 0 REFUSE

 Problem 5
Duration: 5 years
Initial investment amount:
• Land : 80,000 TND, salvage value (selling price at the end of the project life):
annual growth rate : 4%
• Building: 100,000 TND (Totally depreciable; Depreciation: Straight line method:
useful life : 20 years), salvage value (selling price at the end of the project life) :
80,000 TND.
• Industrial Equipment: 70,000 TND (Totally depreciable; Depreciation: Straight line
method: useful life : 10 years), salvage value (selling price at the end of the project
life) : 30,000 TND.
• Net Working Capital: 60 days of sales

Additional investments:
The company will purchase a truck at the beginning of the 3rd year: Purchas. price :
30,000 (Totally depreciable; Depreciation: Straight line method: useful life : 5
years), salvage value (selling price at the end of the project life) : 10,000 TND.
Problem 5
Sales:
end Y1 end Y2 end Y3 end Y4 end Y5
200,000 TND 230,000 250,000 210,000 205,000
Annual costs except depreciation and amortization :
• Variable costs: 40% of sales
• Annual fixed operating cost except D&A: 70,000 TND

WACC : 14%
The project risk being lower than the whole company, the top management decided to use a
discounting rate = 12%

Tax rate: 30%

Q: Compute the project NPV

Solution

Initial investment amount:

I0 = Land + Building + Industrial equipment + Net working
capital
= 80,000 + 100,000 + 70,000 + [200,000(60/360)] =
283,333.333 TND

33,333.333
 Cash flows analysis :
End Y1 End Y2 End Y3 End Y4 End Y5
Sales = (unit price x quant.) 200000 230000 250000 210000 205000
- Variable cost = (unit cost
x quant.) 80000 92000 100000 84000 82000
- Fixed operating cost
except D&A 70000 70000 70000 70000 70000
- Depreciation and amort. 12000 12000 18000 18000 18000
= Net Operating income 38000 56000 62000 38000 35000
- Taxes on operating
income 11400 16800 20400 11400 10500
= Net Operating income
after tax 26600 39200 47600 26600 24500
+ Add back depreciation 12000 12000 18000 18000 18000
+ Total salvage value 217332.232
- Tax loss on LT assets 6699.669
+ Tax benefit on LT assets 2100
- Additional investment 30000
+/- Change in NWC -5000 -3333.333 6666.667 833.3333
+ Recovery of Net Working
Capital at the end of the 5th
year 34166.67
= Project net cash flows 33600 17866.67 68066.67 45433.33 289399.23
Solution : Explanation
Depreciation and Amortization :
Building :
Annual depreciation= 100,000/20 = 5,000 TND
Accumulated depreciation over the project duration= 5,000 x 5 =
25,000 TND
book value at the end of the project = 100,000 – 25,000 = 75,000
TND
book value at the end of the project < salvage value (80,000)
Tax loss from the long term asset = 0.3 x (80,000 -75,000) = 1,500
TND
Solution : Explanation

Industrial equipment :
Annual depreciation= 70,000/10 = 7,000 TND
Accumulated depreciation over the project duration= 7,000 x 5 =
35,000 TND
book value at the end of the project = 70,000 – 35,000 = 35,000
TND
book value at the end of the project > salvage value (30,000)
Tax benefit from the long term asset = 0.3 x (35,000 -30,000) =
1,500 TND
Solution : Explanation

Land :
• Salvage value = 80,000 (1.04)5 = 97,332.232
• Depreciation : land No depreciation
• Salvage value > Book value at the end of the project
• Tax loss from the long term asset = 30% (97,332.232 – 80,000)
= 5,199.669 TND
Solution : Explanation

Truck: to be acquired at the beginning of the 3rd year:

Annual depreciation= 30,000/5 = 6,000 TND
Accumulated depreciation over the project duration= 6,000 x 3 =
18,000 TND
book value at the end of the project = 30,000 – 18,000 = 12,000
TND
book value at the end of the project > salvage value (10,000)
Tax benefit from the long term asset = 0.3 x (12,000 -10,000) =
600 TND
Solution : Explanation
• Year 1 and 2 :
Annual depreciation = 5,000 + 7,000 = 12,000 TND

Year 3, 4 and 5:
Annual depreciation = 5,000 + 7,000 + 6,000 = 18,000 TND

• Total salvage value = 97,332.232 + 30,000 + 80,000 + 10,000 =

217,332.232 TND
 Annual added net working capital:
The added net working capital = corresponding sales (60/360)

The change in NWC should be taken into account at the end of

the year preceding the considered annual sales: the added NWC
is necessary to reach this corresponding sales amount.

End Y1 End Y2 End Y3 End Y4 End Y5

Sales =
(unit price
x quant.) 200,000 230,000 250,000 210,000 205,000
Correspon
ding NWC 33,333.333 38,333.3 41,666.7 35,000 34,166.7
Change in
NWC 33,333.3333 5000 3,333.333 -6,666.7 -833.33

Included in I0
Solution : Explanation
68,066.667
-283,333.33

289,399.23
2444.97

NPV ≥ 0 ACCEPT