1 / 16

Capital Budgeting Problems

Capital Budgeting Problems.

joy
Download Presentation

Capital Budgeting Problems

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Capital Budgeting Problems • 6. OCF from Several Approaches A proposed new project has projected sales of $49,350, costs of $25,000, and depreciation of $6,175. The tax rate is 34 percent. Calculate operating cash flow using three different approaches and verify that the answer is the same in each case. • OCF=NI + Depreciation=11,995.5+6,175=18,170.5 • OCF=Sales-Costs-Tax=49,350-25,000-6,179.5=18,170.5 • OCF= (Sales-Costs)(1-T)+ Depreciation T=(49,350-25,000)(1-0.34)+ 6,175 0.34 • =18,170.5 • OCF= (Sales-Costs- Depreciation)(1-T)+ Depreciation • =(Sales-Costs)(1-T)+ Depreciation T • Tax=(Sales-Costs- Depreciation) T • OCF= Sales-Costs-(Sales-Costs- Depreciation) T • =(Sales-Costs)(1-T)+ Depreciation T

  2. Capital Budgeting Problems • 8. Calculating Salvage Value Consider an asset that costs • $100,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $20,000. If the relevant tax rate is 35 percent, what is the after-tax cashflow from the sale of this asset? • BV5=37,500 • SV5=20,000 • T=35% • NSV=SV5-(SV5-BV5) T=20,000-(20,000-37,500) 0.35=26,125

  3. Capital Budgeting Problems • 24. Cost-Cutting Proposals Rosello’s Machine Shop is • considering a four-year project to improve its production efficiency. • Buying a new machine press for $200,000 is estimated to produce • $85,000 in annual pretax cost savings. The press falls in the • modified ACRS five-year class life, and has a salvage value at the • end of the project of $50,000. The press also requires an initial • investment in spare parts inventory of $15,000, along with an • additional $5,000 in inventory for each succeeding year of the • project. If the shop’s tax rate is 34 percent and its discount rate is • 13 percent, should Rosello’s buy and install the machine press.

  4. Capital Budgeting Problems • CS0=200,000 5 year MACRS • Cost=-85,000 • NWC0=15,000 • NWC=5,000 for 1-3 • T=34% • k=13% • NSV4=SV4-(SV4-BV4) T=50,000-(50,000-34,560) 0.34=44,750.4

  5. Capital Budgeting Problems • .

  6. Capital Budgeting Problems • 29. Expansion Project Terminator Pest Control (TPC), Inc., projects unit sales for a new household-use laser-guided cockroach eradication system as follows: • The eradication system will require $875,000 in net working capital • to start, and additional net working capital investments each year • equal to 35 percent of the projected sales increase for the • following year.(Since sales are expected to fall in Year 5 then, • there is no NWC cash flow occuring for Year 4.) Total fixed costs are • $200,000 per year, variable production costs are $75 per unit, and the units are priced at $105 each.

  7. Capital Budgeting Problems • The equipment needed to begin production has an installed cost of • $9,750,000. This equipment is mostly industrial machinery and • thus qualifies as seven-year modified ACRS property. In five years, • this equipment can be sold for about 28 percent of its acquisition • cost. TPC is in the 38 percent marginal tax bracket and has a • required return on all of its projects of 10 percent. Based on these • preliminary project estimates, what is the NPV of the project? What • is the IRR?

  8. Capital Budgeting Problems

  9. Capital Budgeting Problems

  10. Capital Budgeting Problems • NPV=723,567.96

  11. Capital Budgeting Problems • Replacement Project Topsider, Inc. is considering the purchase • of a new leather-cutting machine to replace an existing machine • which it purchased 2 years ago at a price of $10,000. The old • machine had an expected life of 5 years at the time it was purchased and • is being depreciated straight-line to zero. It can be sold for $5,000 • today. The replacement decision has no effect on net working capital • requirement. The new machine will reduce costs (before taxes) by $7,000 • per year. The new machine has a 3-year life, it costs $14,000, and can be • sold for an expected $2,000 at the end of the third year. The new machine • would be depreciated using the ACRS method. Assume a 40 percent tax • rate. The firm has a required return on all of its projects of 12 percent. • Based on these preliminary project estimates, what is the NPV of the • project?

  12. Capital Budgeting Problems • SVnew=2,000 • BVnew=1,037.4 • NSVnew=2,000-(2,000-1,037.4) 0.4=1,614.96 • Cost=-7,000

  13. Capital Budgeting Problems • NPV=3,956.87

  14. Capital Budgeting Problems • 30. Calculating Required Savings A proposed cost-saving • device has an installed cost of $330,000. The device will be used • in a five-year project, but is classified as three-year modified ACRS • property for tax purposes. The required initial net working capital • investment is $20,000, the marginal tax rate is 35 percent, and the • project discount rate is 12 percent. The device has an estimated • Year 5 salvage value of $45,000. What level of pretax cost savings • do we require for this project to be profitable?

  15. Capital Budgeting Problems • 3 year MACRS • NSV5=SV5-(SV5-BV5) T=45,000-(45,000-0) 0.35=29,250

  16. Capital Budgeting Problems

More Related