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ABSTRACT The case involves setting up cash flows for determining the net present value (NPV), IRR and payback period of an investment project. There is an inflation assumption for the cash flows, which introduces the issue of whether it is consistent with the inflation premium embraced in the required rate of return. Modified accelerated cost recovery (MACRS) is used for depreciation, and this affects the timing of after-tax cash inflows. USING MSEXCEL TO SET UP CASH FLOWS Instead of drawing a time line on paper, we instead set up the cash flows in MS Excel in order to analyze them. Initial Cost 260,000 Inflation 0.04 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Cost Savings - 60,000 62,400 64,896 67,492 70,192 72,999 75,919 78,956 Depreciation Offset 52,000 83,200 49,920 29,952 29,952 14,976 - - Salvage Value 30,000 Net Inc in Tax Income - 8,000 (20,800) 14,976 37,540 40,240 58,023 75,919 108,956 Inc in Cash Taxes (38%) - 3,040 (7,904) 5,691 14,265 15,291 22,049 28,849 41,403 Cash Flow Initial Investment (260,000) - - - - - - - - Cost Savings - 60,000 62,400 64,896 67,492 70,192 72,999 75,919 78,956 Salvage Value - - - - - - - - 30,000 Increase in Taxes - (3,040) 7,904 (5,691) (14,265) (15,291) (22,049) (28,849) (41,403) Total Cash Flow (260,000) 56,960 70,304 59,205 53,227 54,900 50,950 47,070 67,553 NPV @ 13% (260,000) 50,407 55,058 41,032 32,645 29,798 24,472 20,008 25,411 18,831 IRR 15.1% Payback Period 4.37 - - - - 4.37 - - - In setting up the cash flow, we assumed the ff: a.
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