Case Background:

New Drying M/c by IMM

Ram Ratan (PCC) - Engineer
R Ramesh - GM of PCC

Topic
Cash Flow Determination
Objective: Highlight Incremental CF concept
To determine CF focussing on treatment if Depr, Inv Allow

New drying Equipment

Operating Cash Cost
Depreciation(WDV)
Useful Life (Years)
Salvage Value (% of Orginal Value)
Delivery Time (Months)
Installation Cost
Payment @ Order
Payment @ Delivery

Existing Drying Equipment

10.00
25.00%
12
10%
12
15
32.5
32.5

Operating Cash Cost

Cost of Equipment (in 1997)
Useful Life (Years)
Installation Cost (in 1997)
Salvage Value - Now (1999)
Salvage Value - End (2004)

Operating Cost
% of Fuel Cost
% Annual Rise in Fuel Cost
Expected Rate of Inflation
Overall Inflation

ncremental CF concept
ne CF focussing on treatment if Depr, Inv Allowance, Salvage Value, etc.

ng Drying Equipment

Overhauling Drying Equipment

28
25
8
10
4
2

Operating Cash Cost

Capital Expenditure
Life Extension
New Useful Life
Salvage Value - End (2009)

Operating Cost

22
25
5 upto 2009
13
3

Debt Option
80%
10%
6%
9.20%

Years
Annual Interest Rate
Govt. Bond Yield
Risk Premium (Long Term)
Risk Premium (Replacement)

10
15%
12.50%
7.50%
3.50%

Cost of Capital (Long Term)

Cost of Capital (Replacement)

20.00%
16.00%

Corporate Tax

35.00%

No.

Year

Depreciation
(Old Machine)

1
2
3
4
5
6
7
8
9
10
11
12

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

8.75
6.56
4.92
3.69
2.77
2.08
1.56
1.17
0.88
0.66
0.49
0.37
0.28
0.21
0.16

Tax Saving
(Old
Depreciation)

1.29
0.97
0.73
0.55
0.41
0.31
0.23
0.17
0.13
0.10
0.07
0.05

Value of New Machine

Value on New Machine
Salvage Value
BV of Old Machine
Net Value

Book Value
(Old Machine)

Depreciation
(New Machine)

26.25
19.69
14.77
11.07
8.31
6.23
4.67
3.50
2.63
1.97
1.48
1.11
0.83
0.62
0.47

22.69
17.02
12.76
9.57
7.18
5.38
4.04
3.03
2.27
1.70
1.28
0.96

New Block For Depr

80
-4
14.77
90.77

Opening Block
Add: New Inv
Less: SV or BV

Tax Saving
(New Depreciation)

Book Value
(New Machine)

Incremental Benefit
(Depreciation)
i.e. Increase in DTS

ATCS
i.e.PAT

7.94
5.96
4.47
3.35
2.51
1.88
1.41
1.06
0.80
0.60
0.45
0.34

68.07
51.06
38.29
28.72
21.54
16.15
12.12
9.09
6.82
5.11
3.83
2.88

6.65
4.99
3.74
2.81
2.10
1.58
1.18
0.89
0.67
0.50
0.37
0.28

11.70
11.70
11.70
11.70
11.70
11.70
11.70
11.70
11.70
11.70
11.70
11.70

New Block For Depreciation

(25+10) - (Depr. For 1997-19999)
14.77
80
-4
90.77

Investment
Allowance
Tax Shield
(IATS)

Tax Shield
(Loss)

Salvage
Value

7.00

3.77

Net Cash Flow

PV of NCF

33.12
16.69
15.44
14.51
11.80
13.28
12.88
12.59
12.37
12.20
12.07
18.48

28.55
12.40
9.89
8.01
5.62
5.45
4.56
3.84
3.25
2.77
2.36
3.11

-2

6.5

-89.81

PV
Cash Out Flow

89.81
85.2

NPV
IRR

4.61

33.1
16.7
15.4
14.5
11.8
13.3
12.9
12.6
12.4
12.2
12.1
18.5

-56.69203125
16.6875
15.440625
14.50546875
11.80410156
13.27807617
12.88355713
12.58766785
12.36575089
12.19931316
12.07448487
18.48086365
22%

Net Cash Flow

(Without Inv. All)

26.12
16.69
15.44
14.51
11.80
13.28
12.88
12.59
12.37
12.20
12.07
18.48

PV of NCF
(Without Inv.
All)

22.52
12.40
9.89
8.01
5.62
5.45
4.56
3.84
3.25
2.77
2.36
3.11

PV
Cash Out Flow

83.78
85.2

NPV

-1.42

N0.

Year

Depreciation
(Old Machine)

1
2
3
4
5
6
7
8
9
10
11
12

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

8.75
6.56
4.92
3.69
2.77
2.08
1.56
1.17
0.88
0.66
0.49
0.37
0.28
0.21
0.16

Book Value
Depreciation
(Old Machine) (New Machine)
26.25
19.69
14.77
11.07
8.31
6.23
4.67
3.50
2.63
1.97
1.48
1.11
0.83
0.62
0.47

Value of New Machine

Value on New Machine
Salvage Value
BV of Old Machine
Net Value

80
-4
14.77
90.77

22.69
17.02
12.76
9.57
7.18
5.39
4.04
3.03
2.27
1.70
1.28
0.96

Book Value
(New Machine)

Tax Saving
(Old Depreciation)

Tax Saving
(New Depreciation)

Incremental Benefit
(Depreciation)

68.08
51.06
38.29
28.72
21.54
16.16
12.12
9.09
6.82
5.11
3.83
2.88

1.29
0.97
0.73
0.55
0.41
0.31
0.23
0.17
0.13
0.10
0.07
0.05

7.94
5.96
4.47
3.35
2.51
1.88
1.41
1.06
0.80
0.60
0.45
0.34

6.65
4.99
3.74
2.81
2.10
1.58
1.18
0.89
0.67
0.50
0.37
0.28

PAT

12.78
13.95
15.24
16.64
18.17
19.84
21.66
23.66
25.83
28.21
30.81
33.64

Investment
Allowance

Tax Shield
(Loss)

Salvage
Value

7.00

3.77

Net Cash Flow

PV of NCF

34.19
18.94
18.98
19.44
18.27
21.42
22.85
24.55
26.50
28.71
31.18
40.42

29.48
14.08
12.16
10.74
8.70
8.79
8.08
7.49
6.97
6.51
6.09
6.81

-2

6.5

PV
Cash Out Flow

125.89
85.2

NPV

40.69

2
2
3
4

Net Cash Flow

(Without Inv. All)

27.19
18.94
18.98
19.44
18.27
21.42
22.85
24.55
26.50
28.71
31.18
40.42
PV
Cash Out Flow

PV of NCF
(Without Inv.
All)

23.44
14.08
12.16
10.74
8.70
8.79
8.08
7.49
6.97
6.51
6.09
6.81
119.85
85.2

NPV
-47.5

34.65
-32.5
27.19475156
18.93961591
18.97623738
19.44268383
18.27188519
21.41725447
22.84790877
24.54511653
26.49966737
28.70993686
31.18047612
40.42099873

-32.5
-47.5
27.1947516
18.9396159
18.9762374
19.4426838
18.2718852
21.4172545
22.8479088
24.5451165
26.4996674
28.7099369
31.1804761
40.4209987
23.81%

N0.

Year

Depreciation
(Old Machine)

Book Value
(Old Machine)

Depreciation
(OH)

Book Value
(OH)

1
2
3
4
5
6
7
8
9
10

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

8.75
6.56
4.92
3.69
2.77
2.08
1.56
1.17
0.88
0.66
0.49
0.37
0.28

26.25
19.69
14.77
11.07
8.31
6.23
4.67
3.50
2.63
1.97
1.48
1.11
0.83

9.94
7.46
5.59
4.19
3.15
2.36
1.77
1.33
1.00
0.75

29.82
22.37
16.78
12.58
9.44
7.08
5.31
3.98
2.99
2.24

Value of OH Machine
Value
Old BV
Net Value

25
14.77
39.77

Tax Saving
(Old Depreciation)

Tax Saving
(OH)

Incremental Benefit
(Depreciation)

PAT

1.29
0.97
0.73
0.55
0.41
0.31
0.23
0.17
0.13
0.10

3.48
2.61
1.96
1.47
1.10
0.83
0.62
0.46
0.35
0.26

2.19
1.64
1.23
0.92
0.69
0.52
0.39
0.29
0.22
0.16

3.90
3.90
3.90
3.90
3.90
3.90
3.90
3.90
3.90
3.90

Investment
Allowance

2.19

Salvage
Value

Net Cash Flow

PV of NCF

8.28
5.54
5.13
4.82
2.59
4.42
4.29
4.19
4.12
7.06

6.90
3.85
2.97
2.33
1.04
1.48
1.20
0.97
0.80
1.14

-2

Net Cash Flow

(Without Inv. All)

6.09
5.54
5.13
4.82
2.59
4.42
4.29
4.19
4.12
7.06

PV of NCF
(Without Inv. All)

5.07
3.85
2.97
2.33
1.04
1.48
1.20
0.97
0.80
1.14

PV
Cash Out Flow

22.67 PV
25 Cash Out Flow

20.85
25

NPV

-2.33 NPV

-4.15

N0.

Year

Depreciation
(Old Machine)

Book Value
(Old Machine)

Depreciation
(OH)

Book Value
(OH)

1
2
3
4
5
6
7
8
9
10

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

8.75
6.56
4.92
3.69
2.77
2.08
1.56
1.17
0.88
0.66
0.49
0.37
0.28

26.25
19.69
14.77
11.07
8.31
6.23
4.67
3.50
2.63
1.97
1.48
1.11
0.83

9.94
7.46
5.59
4.19
3.15
2.36
1.77
1.33
1.00
0.75

29.82
22.37
16.78
12.58
9.44
7.08
5.31
3.98
2.99
2.24

Value of OH Machine
Value
Old BV
Net Value

25
14.77
39.77

Tax Saving
(Old Depreciation)

Tax Saving
(OH)

Incremental Benefit
(Depreciation)

PAT

1.29
0.97
0.73
0.55
0.41
0.31
0.23
0.17
0.13
0.10

3.48
2.61
1.96
1.47
1.10
0.83
0.62
0.46
0.35
0.26

2.19
1.64
1.23
0.92
0.69
0.52
0.39
0.29
0.22
0.16

4.26
4.65
5.08
5.55
6.06
6.61
7.22
7.89
8.61
9.40

Investment
Allowance

2.19

Salvage
Value

Net Cash Flow

PV of NCF

8.63
6.29
6.31
6.47
4.75
7.13
7.61
8.18
8.83
12.57

7.19
4.37
3.65
3.12
1.91
2.39
2.12
1.90
1.71
2.03

-2

Net Cash Flow

(Without Inv. All)

6.45
6.29
6.31
6.47
4.75
7.13
7.61
8.18
8.83
12.57

PV of NCF
(Without Inv. All)

5.37
4.37
3.65
3.12
1.91
2.39
2.12
1.90
1.71
2.03

PV
Cash Out Flow

30.40 PV
25 Cash Out Flow

28.58
25

NPV

5.40 NPV

3.58

Computed NPV's for various Combinations

Existing Vs New Equipment
With Investment Allowance
Without Investment Allowance

Existing Vs Overhauling
With Investment Allowance
Without Investment Allowance

Without Inflation
4.61
-1.42

Without Inflation
-2.33
-4.15

binations
With Inflation
40.69
34.65

With Inflation
5.40
3.58