This tutorial uses the following example to provide a step-by-step procedure for
using FINCALC and to demonstrate the output of net present value and annualized cash flow
as a function of discount rates between 5% and 20%.
A new capital item is to be installed to provide better corrosion protection.
Prior to spending capital, a short research and testing program has been initiated to define a
number of variables that may alter the capital expenditure. The research and testing is
expected to take place in the first year with capital being spent in the second. The
research and testing effort is expected to cost $15000 and the capital is expected to
cost about $125000. Once the item is in place, periodic maintenance of $2000 per year
is expected to begin in the third year. That expenditure is expected to grow at about
3% per year. In addition, some ongoing corrosion monitoring is expected that will
initially cost $3000 per year also starting in the third year.
That expenditure is expected to grow at 2% per year.
Project life is the entire life of the project including the time for
research and testing. The life of this project is 11 years because only research and testing occurs in the
first year, captial expenditure and start-up occur in the second, and the total time for
depreciation is 10 years. Two isolated occurrences are expected that
will cost an average of $10000. The salvage value of the equipment at the end of 11 years
of the overall project is expected to be $10000 at that time. Straight line depreciation is
used and the equipment is depreciated over 10 years. The tax rate is assumed to be 50%.
Input Parameter
Value
Project Life
11 years
Research/Testing
$15000 in yr 1
Capital
$125000 in yr 2
Tax Rate
50%
Depreciation Schedule
Straight Line
Depreciation Life
10 yrs
Periodic Maintenance Expense
$3000 w/2% growth
Periodic Monitoring Expense
$2000 w/3% growth
Isolated (one time) Expense
2 @ $10000 each
Equipment Salvage
$10000 in yr 11
Detailed Instructions:
FINCALC is located at the web site www.argentumsolutions.com.
Enter FINCALC. One of the headings in the left hand column of each page is
entitled "Corrosion Economic Calculator". FINCALC is entered by
clicking on the icon listed under that heading.You are taken to an opening page which overlays the page you
are on.
This page contains general information. When you have finished reading this information,
left click on the button labeled "Enter FINCALC" at the top or bottom of the page.
This action takes you into the FINCALC environment.
If you wish, read the "Instructions" to get a brief introduction
to FINCALC and what you are asked to do. Note that you can change an entry at
any time before running the tool.
At this point you are ready to enter the values that will be used as inputs
to FINCALC. The values used for this example have been entered in the spaces below. The
values are from the table above. If, while in FINCALC, you need additional information,
a help window can
be opened by selecting "Help on this topic". All of the information must be filled in.
You will be prompted if required information is omitted or incorrectly entered.
In FINCALC:
Life of Project
Enter the expected life time in years. Help on this topic This time should be the total project lifetime that includes test work, construction, in-service and dismantling.
If capital expenditure stretches over 2 years, this time includes both years.
Expected Life = years
Tax Rate
Enter the tax rate as a percent to be used in the calculation. Help on this topic A tax rate of 50% might be used if the actual rate is not known.
Tax Rate = percent
Research, Development, and Testing
Enter the total expected expenditure per year for all development activities. Help on this topic Note that two years are allowed for development work.
Expenditure in the second year only is probably unlikely.
Year 1 Expense = $
Year 2 Expense = $
Capital Expenditure
Enter the total expected expenditure per year for all capital. Help on this topic
Note that two years are allowed for for this expenditure to occur.
If no expenditure occurs in one of the years, enter 0 (dollars) for that year.
Year 1 Capital = $
Year 2 Capital = $
Depreciation Schedule
Choose the depreciation schedule you want to use.
Help on this topic If in doubt, choose "Straight Line Depreciation".
Straight Line Depreciation
Declining Balance Depreciation
Input number of years for write-off Value entered must be LESS than the project life
Number of years = years
Periodic Maintenance, Repair or Other Expenses
Enter the expected expenditure per year for periodic maintenance, repair, or other expenses. Help on this topic Three entries are required:
Year in which expense started - usually at least one year after start-up.
Yearly charge for periodic expense in dollars.
Growth of periodic expense per year in percent (use 0 if not known).
Note: that you can split these expenditures between this and the next set of entries.
Starting Year =
Yearly Amount = $
Growth Rate = %
Periodic Maintenance, Repair or Other Expenses
Enter the expected expenditure per year for periodic maintenance, repair, or other expenses. Help on this topic Three entries are required:
Year in which expense started - usually at least one year after start-up.
Yearly charge for periodic expense in dollars.
Growth of periodic expense per year in percent (use 0 if not known).
Enter 0 for all values if you have lumped all such expenses together in the last set of entries.
Starting Year =
Yearly Amount = $
Growth Rate = %
Isolated Repairs or Other Expenses
Enter the expected expenditure for larger isolated repairs or other expenses that might occur. Help on this topic Two entries are required:
The number of such items over the life of the project
Charge for each of the items in dollars.
The program evenly spaces the occurrences over the life of the project.
Enter 0 for all values if such isolated items are not anticipated or are not to be included.
No. of occurrences =
Cost per occurrence = $
Equipment Salvage Value
Enter the expected credit for salvage of equipment at the end of the project. Help on this topic Enter a value of 0 if the Declining Balance Depreciation Schedule is used.
Entering a value other than 0 is valid if Straight Line Depreciation Schedule is used
Salvage Value = $
At this point, you are ready to run FINCALC. If your inputs are as you want
them, click on the button labeled "Run FINCALC" and the result will emerge on the next
screen. If you want to change one or several items, you can retype the entry or click on a
different selection depending on the step above. Only if you want to reenter ALL of your inputs
should you click on the button labeled "Start Over".
In FINCALC:
After you have clicked on "Run FINCALC" a new screen appears which contains
the net present value and annualized cash flow as a function of discount rate between 5% and
20% if the growth of periodic maintenance, repairs, and other expenses is less than or equal
to 5%. The lower bound of the discount rate will be the growth rate if the latter is greaer
than 5%. The result for the above case is shown below.
In FINCALC:
RESULTS
Discount Rate (%)
Net Present Value ($)
Annualized Cash Flow ($)
5
-104087.36
-12530.96
6
-104476.20
-13246.84
7
-104749.68
-13969.09
8
-104921.43
-14697.01
9
-105003.46
-15429.91
10
-105006.35
-16167.11
11
-104939.48
-16907.95
12
-104811.13
-17651.81
13
-104628.63
-18398.05
14
-104398.49
-19146.08
15
-104126.46
-19895.34
16
-103817.67
-20645.26
17
-103476.65
-21395.33
18
-103107.46
-22145.05
19
-102713.68
-22893.94
20
-102298.51
-23641.57
Negative values signify cash outflow
INPUT VALUES
Project Life = 11 years
Tax Rate = 50 percent
Year 1 R&D,Testing= 15000 dollars
Year 1 R&D,Testing= 0 dollars
Year 1 Capital = 0 dollars
Year 2 Capital = 125000 dollars
Depreciation = Straight Line
Depreciation years= 10 years
Salvage Value = 10000 dollars
Maintenance start = 3 years
Maintenance cost = 3000 dollars
Maintenance inc. = 2 percent
Period. repair start= 3 year
Period. repair cost= 2000 dollars
Period repair inc.= 3 percent
Spec.repair start = 2 year
Spec. repair cost = 10000 dollars
David C. Silverman, Ph.D. - Primary Consultant E-Mail:dcsilverman@argentumsolutions.com Phone: 314-576-3586 Fax: 314-754-9825 Address: The Argentum House
14314 Strawbridge Ct.
Chesterfield, MO 63017
