Question

Homework #2: Stock Valuation and Cashflow Analysis 2. (60) your department just launched a 4-year project, involving purchase of a piece of equipment for $300 at period 0. The equipment is to be depreciated evenly and fully in the first two years and will be liquidated at the end of year 4 for $50. Assume that the tax law is such that any losses could be carried over to offset future years' profits before taxes indefinitely. For example, if in period 1, there is a loss of $10, that $10 could be used to offset Profits before Tax in period 2 to reduce taxes. If Profit before Tax in period 2 happens to be $20, the tax base in period 2 will be = $20-$10 = $10. The $10 is then subject to tax in period 2. If period 2 also incur losses, the $10 loss will be carried forward until there is a year with positive income. Please complete the worksheet as provided (you could copy it to EXCEL). Add any lines you'd like to help or highlight any of the calculations. Use a discount rate of 10%. Show the NPV and IRR for the project.

Answer 1

	period 0	period 1	period 2	period 3	period 4
cost of acquistion	300
salvage value	50
less tax on gains(tax @20%)	-10
cash flow from investment (terminal)	40
Present value of Terminal cashflow	27.320538
revenue		300	200	200	600
cost of goods sold		-100	-100	-400	-100
depreciation		-150	-150	0	0
profit before tax		50	-50	-200	500
loss carried forward		0	0	-50	-250
adjusted profit/ In case of loss forward it		50	0	-250	250
taxes(20%)		-10	0	0	-50
profit after tax		40	0	0	200
+ depreciation		150	150	0	0
CFAT		190	150	0	200
operating cash flow
accounts recievables	0	90	120	300	0
accounts payable	0	-10	0	-50	0
total cash flow	0	270	270	250	200
		0.90909091	0.82645	0.7513148	0.68301346
present value of cashflow		245.4545	223.1405	187.8287	136.6027
Present value of annual cashflow and terminal cashflow	820.347
NPV	520.347
IRR	34%

As losses has to be carried forward, the year of loss after forwarding it will be shown as $0 as this loss has been forwarded to next year. If you will account that loss in that year as well next year, it will be incorporated twice.