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EQUIPMENT COSTS

EQUIPMENT COSTS. Peters Timmerhaus & West. PURCHASED EQUIPMENT p.243 PT&W. Cost a/Cost b=(size a/size b) 0.6. Lang Factor (in this example) = 4.3 We will say I F = 5.0*E. SHOW ME THE MONEY! CHE462. “Figures don’t lie, but liars sure can figure!” BECKMAN 2012.

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EQUIPMENT COSTS

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  1. EQUIPMENT COSTS Peters Timmerhaus & West

  2. PURCHASED EQUIPMENT p.243 PT&W Cost a/Cost b=(size a/size b)0.6

  3. Lang Factor (in this example) = 4.3 We will say IF = 5.0*E

  4. SHOW ME THE MONEY!CHE462 “Figures don’t lie, but liars sure can figure!” BECKMAN 2012

  5. CASH FLOW & ROI (standard) Operating cost $/yr bye-bye C Income tax $/yr bye-bye f(S-C-d) Gross Sales $/yr S Profit before tax, $/yr S-C-d Net sales, $/yr S-C Operating Cost depreciation Income tax f depreciation $/yr d=IF/NF Profit after tax, $/yr (1-f)( S-C-d) Total Investment. $ IF =5.0*SE IW =(C/12)*NW Total Profit after tax (1-f)( S-C-d)+d IF+IW Total Investment = ROI = ($/yr)/$

  6. EXAMPLE of ROI (standard) S (sales) = $100 million/year C (operating cost) = $60 million/year E (equipment cost) = $10 million N (project life) = 20 years NW (working capital months) = 3 j(income tax rate ) = 0.4 Then IF = 5*$10 = $50 d = $50/20 yr = $2.5/yr IW = $60/yr*3mo/12mo/yr = $15 ROI = ((100-60-2.5)*(1-.4) +2.5)/(50+15) = 0.385/yr = 38.5%/yr

  7. EXAMPLE MAX ROI (standard) By observation, if E is increased from $10 million to $15 million, maybe C will decrease from $60 million/yr to $40 million/yr so: S (sales) = $100 million/year C (operating cost) = $40 million/year E (equipment cost) = $15 million N (project life) = 20 years NW (working capital months) = 3 j(income tax rate ) = 0.4 Then IF = 5*$15 = $75 d = $75/20 yr = $3.75/yr IW = $40/yr*3mo/12mo/yr = $10 ROI = ((100-40-3.75)*(1-.4) +3.75)/(75+10) =0.435/yr =43.5%/yr

  8. Lets EXPENSE the Investmentwe willBORROW IF i(1+i)N R/IF = (1+i)N -1 If interest rate is 5% and project life is 20 years, then = .05*(1.05)20 /[1.0520 -1] = 0.0802 /yr Total loan payback = N*R/IF = 20*.0802 = 1.60 or 60% more than you borrowed!

  9. CASH FLOW & ROI (IF Expensed) Operating cost $/yr bye-bye C+R Income tax $/yr bye-bye f(S-C-R-d) Gross Sales $/yr S Profit before tax, $/yr S-C-R-d Net sales, $/yr S-C-R Operating Cost depreciation Income tax f depreciation $/yr d=IF/NF Profit after tax, $/yr (1-f)( S-C-R-d) Total Investment. $ IF =5.0*SE isR = IF*i(1+i)N /[(1+i)N -1] IW =[(C+R)/12]*NW Total Profit after tax (1-f)( S-C-R-d)+d IW Total Investment = ROI = ($/yr)/$

  10. EXAMPLE of ROI with IF expensed S (sales) = $100 million/year C (operating cost) = $60 million/year E (equipment cost) = $10 million N (project life) = 20 years NW (working capital months) = 3 j(income tax rate ) = 0.4 i=5% Then IF = 5*$10 = $50 R= 0.0802*$50 = $4.0/yr d = $50/20 yr = $2.5/yr IW = $60/yr*3mo/12mo/yr = $15 ROI = ((100-60-4.0-2.5)*(1-.4) +2.5)/(0+15) = 1.51/yr = 151%/yr If E=$15 million and C= $40 million/yr, then ROI=295% wow

  11. RULE # 1 IN BUSINESS • NEVER BUY something when you can either rent or borrow (or steal?)!!!!!

  12. CASH FLOW & ROI (d Payback into IF) Operating cost $/yr bye-bye C Income tax $/yr bye-bye f(S-C-d) OK here Gross Sales $/yr S Profit before tax, $/yr S-C-d Net sales, $/yr S-C Operating Cost depreciation Income tax f depreciation $/yr d=IF/NF Profit after tax, $/yr (1-f)( S-C-d) Total Investment. $ (where n is the nth year of the project IF = 0 after n = NF ) IF =5.0*SE -n*d IW =(C/12)*NW Total Profit after tax (1-f)( S-C-d) IF+IW Total Investment = ROI = ($/yr)/$

  13. EXAMPLE of ROI ( d payback) S (sales) = $100 million/year C (operating cost) = $60 million/year E (equipment cost) = $10 million N (project life) = 20 years NW (working capital months) = 3 j(income tax rate ) = 0.4 Then IF = 5*$10 = $50 initially d = $50/20 yr = $2.5/yr IW = $60/yr*3mo/12mo/yr = $15 ROI = ((100-60-2.5)*(1-.4) +2.5)/(50-2.5+15) = 0.40/yr = 40%/yr For year 1

  14. IF with d payback as a function on time (“book value”)

  15. ROI as a function of time(with d payback into IF)

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