1 / 12

CHAPTER 12 Cash Flows and Other Topics in Capital Budgeting

CHAPTER 12 Cash Flows and Other Topics in Capital Budgeting. 7 $158,400. 0. 1 $197,500. 2 $197,500. 3 $197,500. 5 $197,500. 6 $158,400. 8 $158,400+ $41,400 = $199,800. 4 $197,500. Time line for Solution Practice Problem 2. Cash Flows. Terminal Cash flow. Initial outlay

bwinter
Download Presentation

CHAPTER 12 Cash Flows and Other Topics in Capital Budgeting

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. CHAPTER 12 Cash Flows and Other Topics in Capital Budgeting

  2. 7 $158,400 0 1 $197,500 2 $197,500 3 $197,500 5 $197,500 6 $158,400 8 $158,400+ $41,400 = $199,800 4 $197,500 Time line for Solution Practice Problem 2 Cash Flows Terminal Cash flow Initial outlay $590,000 Annual Cash Flows

  3. Problem 2 Automation Project: • Cost of equipment = $550,000. • Shipping & installation will be $25,000. • $15,000 in net working capital required at setup. • 8-year project life, 5-year class life. • Simplified straight line depreciation. • Current operating expenses are $640,000 per yr. • New operating expenses will be $400,000 per yr. • Already paid consultant $25,000 for analysis. • Salvage value after year 8 is $40,000. • Cost of capital = 14%, marginal tax rate = 34%.

  4. Problem 2 Initial Outlay: (550,000) Cost of new machine + (25,000) Shipping & installation (575,000) Depreciable asset + (15,000) NWC investment (590,000) Net Initial Outlay

  5. Problem 2 For Years 1 - 5: 240,000 Cost decrease (115,000) Depreciation increase 125,000 EBIT (42,500) Taxes (34%) 82,500 EAT 115,000 Depreciation reversal 197,500 = Annual Cash Flow

  6. CALCULATION OF ANNUAL DEPRECIATION FOR NEW MACHINE: Depreciable asset/class life =$575,000/5 yrs = $115,000 The machine is used only for 5 years. From years 6-10, no depreciation; therefore depreciation will be $0 for these last 5 years.

  7. Problem 2 For Years 6 - 8: 240,000 Cost decrease ( 0) Depreciation increase 240,000 EBIT (81,600) Taxes (34%) 158,400 EAT 0 Depreciation reversal 158,400 = Annual Cash Flow

  8. Problem 2 Terminal Cash Flow: 40,000 Salvage value (13,600) Tax on capital gain 15,000 Recapture of NWC 41,400 Terminal Cash Flow

  9. CALCULATION OF TERMINAL CASH FLOW Annual depreciation of new machine=$115,000 (from slide 7) Book value = Depreciable asset – Total amount depreciated = $575,000 - $115,000(5yrs) = $0 Capital gain = Salvage value-Book Value = $40,000-$0 = $40,000 Tax on capital gain = 34% x $40,000 = $13,600 (refer slide 8)

  10. Problem 2 Solution NPV and IRR: • CF(year 0) = -$590,000 (slide 4) • CF(years 1 - 5) =$197,500 (slide 5) • CF(years 6 - 7) = $158,400 (slide 7) • CF(year 8) = $158,400 + $41,400 = $199,800 (slides 7 + 8) • Discount rate = 14%. • IRR = 28.13% • NPV = $293,543. • We would accept the project.

  11. FINDING NPV-1st method (annuity + individual CF) NPV = -$590,000 (year 0) + $197,500 (PVIFA 14%, years 1-5) (years 1-5) + $158,400 (PVIF 14%, 6th yr) (year 6) + $158,400 (PVIF 14%, 7th yr) (year 7) + $199,800 (PVIF 14%, 8th yr) (year 8) = -$590,000 + $197,500(3.4331) + $158,400 ( (0.4556) + $158,400 ( (0.3996) + $199,800 (0.3506) = -$590,000 +$678,037 +$72,167 +$63,297 +$70,050 = -$590,000 +$883,551 = $293,551 Accept the project since NPV is positive.

  12. FINDING NPV-2nd method (annuities) NPV = -$590,000 (year 0) + $197,500 (PVIFA 14%, 5years) (years 1-5) + $158,400 (PVIFA 14%, 2 years,6&7) (PVIF 14%, 5)(annuities years 6-7)(bring back to time 0). Refer to TVM ppt, slides 68-71 for understanding. + $199,800 (PVIF 14%,10th year) (year 8) = -$590,000 + $197,500(3.4331) + $158,400 (1.6467)(0.5194) + $199,800 (0.3506) = -$590,000 +$678,037 +$135,479 +$70,050 = -$590,000 +$883,556 = $293,566 Accept the project since NPV is positive.

More Related