look page 11 question 6

SOLUTION 6:
a. Calculation of incremental cash flow:
     
    Year 0
    Year 1
    year 2
    Year 3
    Year 4
    Year 5
    Year 6
    Year 7
    Year 8
    Initial outlay
     (2,125,000)
     
     
     
     
     
     
     
     
    Revenue
     
     1,565,000
     1,713,675
     1,876,474
     2,054,739
     2,249,939
     2,463,684
     2,697,734
     2,954,018
    Sale of scrap (Net of tax)
     
     
     
     
     
     
     
     
     70,000
    less: Costs
     
     
     
     
     
     
     
     
     
    Additional material cost
     
     850,000
     896,750
     946,071
     998,105
     1,053,001
     1,110,916
     1,172,016
     1,236,477
    Additional labor costs
     
     350,000
     369,250
     389,559
     410,984
     433,589
     457,436
     482,595
     509,138
    Other miscellaneous costs
     
     52,000
     54,860
     57,877
     61,061
     64,419
     67,962
     71,700
     75,643
    Depreciation
     
     265,625
     265,625
     265,625
     265,625
     265,625
     265,625
     265,625
     265,625
    Net profit before tax
     
     47,375
     127,190
     217,342
     318,964
     433,306
     561,745
     705,797
     867,135
    Less: Tax @30%
     
     14,213
     38,157
     65,203
     95,689
     129,992
     168,523
     211,739
     260,140
    Net flow after tax
     
     33,163
     89,033
     152,139
     223,275
     303,314
     393,221
     494,058
     606,994
    add: Depreciation
     
     265,625
     265,625
     265,625
     265,625
     265,625
     265,625
     265,625
     265,625
    Net incremental cash flow
     (2,125,000)
     298,788
     354,658
     417,764
     488,900
     568,939
     658,846
     759,683
     942,619
b. Calculation of payback period:
     
    Cash flows
    Cumulative cash flow
    Year 0
     (2,125,000)
     (2,125,000)
    Year 1
     298,788
     (1,826,213)
    year 2
     354,658
     (1,471,555)
    Year 3
     417,764
     (1,053,790)
    Year 4
     488,900
     (564,890)
    Year 5
     568,939
     4,049
    Year 6
     658,846
     662,895
    Year 7
     759,683
     1,422,578
    Year 8
     942,619
     2,365,198
Payback period = 4+ 549890/572689
=4.96 years
c) Calculation of net present value:
     
    Cash flows
    Present value factor @12.5%
    Present value of cash flow
    Year 0
     (2,125,000)
     1.00
     (2,125,000)
    Year 1
     298,788
     0.89
     265,589
    year 2
     354,658
     0.79
     280,224
    Year 3
     417,764
     0.70
     293,409
    Year 4
     488,900
     0.62
     305,218
    Year 5
     568,939
     0.55
     315,721
    Year 6
     658,846
     0.49
     324,989
    Year 7
     759,683
     0.44
     333,092
    Year 8
     942,619
     0.39
     367,381
     
     
    Net Present value
     360,623
d) Calculation of present value index of the...