Introduction to Finance

TA B L E L E 1 7 . 1
Initial Outlays for Plant Addition Project ($ Millions)
t
 = 0
Depreciable outlays
–$4.5
Expensed cash outlays, after tax
–0.4
–$4.9
28
The funds will be recovered as inventory is sold, accounts receivable are collected, and raw material accounts 
payable are paid in full.

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558
C H A PT E R 1 7 Capital Budgeting Analysis
With the net working capital recovery, operating cash fl ow in year fi ve is the following:
OCF = ($3.000 − 0.635 − $0.900) (1 − 0.40) + $0.900 − (−$0.1) = $1.879 
Cash Flow Estimation for a Cost-Saving Project 
For a cost-saving project, the incremental cash fl ows are usually the diff erence between the 
cash fl ows of two mutually exclusive investments: keeping the existing capital equipment 
and purchasing new equipment. Suppose a fi rm is considering a project to replace an older 
TA B L E L E 1 7 . 2
Project Income Statement, for Years 1 through 5 ($ millions)
Sales
$3.000
– Costs
–0.635
– Depreciation
–0.900
EBT
$1.465
– Taxes (40%)
–0.586
Net income
$0.879
Operating cash flow estimates using equation 17-4, spreadsheet format:
Year 1
Year 2–4
Year 5
Tax rate:
40%
Sales
$3.000
$3.000
$3.000
–Cost
–$0.635
–$0.635
–$0.635
–Depreciation –$0.900
–$0.900
–$0.900
SUM = EBT
$1.465
$1.465
$1.465
× (1 – 
T
)
$0.879
$0.879
$0.879
+Depreciation
$0.900
$0.900
$0.900
–change NWC
–$0.100
$0.000
$0.100
Operating CF
$1.679
$1.779
$1.879