Cash Flow

Cash flow estimation – 14 – Robert Montoya, Inc.

1) Incremental cash flow is the additional cash flow- outflow or inflows- expected to result from a proposed capital expenditure. Cash flows directly affect the firm’s ability to pay bills.

The interest expense should be included in the cash flow statement since it has a tax shield effect on the cash flow related to income tax.

2) No, the $300,000 that was spent to rehab the plant should not be included. It is a sunk cost. It has to be expensed before the new wine project.

3) The potential rent should be included in the analysis as an opportunity cost.

4) The net investment outlay at year 0 is $2,500,000 and the terminal value at year 4 is $190,000, net $60,000 income tax. See spreadsheet

5) The projects operating cash flows are

Year 0 $2, 500, 00

Year 1 784,800

Year 2 900,000

Year 3 612,000

Year 4 725,200

NVP is ($87,617.79) | | | | | |

| Year | Item | Amount | PV factor | Present value |

| | Initial investment | | | |

| 0 | outlay | ($2,500,000) | 1.00 | ($2,500,000) |

| 1 | Net operating cash flow | 784,800 | 0.9091 | $ 713,454.55 |

| 2 | Net operating cash flow | 900,000 | 0.8264 | $ 743,801.65 |

| 3 | Net operating cash flow | 612,000 | 0.7513 | $ 459,804.66 |

| 4 | Net operating cash flow | 725,200 | 0.683 | $ 495,321.00 |

| | | | | ($87,618) |

IRR is 8.32% which is much lower than the project’s cost of capital which is 10%

MIRR is 9.02%

Pay back is roughly 3 yrs. and 4 months.

Year | Item | Amoutn | Balance |

0 | initial investment outlay | ($2,500,000) | ($2,500,000) |

1 | net operating cash flow | 784,800 | (1,715,200) |

2 | net operating cash flow | 900,000 | (815,200) |

3 | net operating cash flow | 612,000 | 203,200 |

4 | net operating cash flow | 725,200 | 522,000 |

6) Incremental revenues need to be computed between the old and new facilities.

Incremental...