Page 499 - Introduction to Business

CHAPTER 13 Financial Management of the Firm and Investment Management 473

b. Operating costs (total of inventory, labor, utility divide the first year’s net cash flow by 1.15, divide
bills, etc.) the second year’s net cash flow by (1.15) , year 3 by
2
4
3
5
c. Depreciation and amortization (of equipment (1.15) , year 4 by (1.15) , and year 5 by (1.15) . Now
and property) add up these discounted net cash flows for the five
years to get the total present value of net cash
d. Taxes (assume 25 percent unless you have a flows. Subtract from this total present value the
more accurate estimate)
investment cost in question 1. Did you get a posi-
e. Net income after taxes tive or negative net present value (NPV)? Should
f. Net cash flow (net income after taxes plus non- you invest in this new business? Do you think that
cash charges such as depreciation and amorti- a different discount rate than 15 percent should be
zation) used due to the riskiness of your new business?
3. Discount back your net cash flows using a 15 per-
cent discount rate or cost of capital. To do this,

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