11-Evaluating Capital Budgeting

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Page 1 11model 10/6/2009 8:15 1/13/2003 Chapter 11. Spreadsheet Model for Capital Budgeting This worksheet contains the model used to analyze BQC's new project decision as described in the text. In addition, models for analyzing replacement decisions and bond refunding decisions are provided on separate sheets that can be accessed by pressing the TAB keys labeled "Replacement Analysis" and "Bond Refunding" at the bottom of the screen. They are meant to accompany the Web Appendices for this chapter. Model for Evaluating A New Capital Budgeting Project: The first section of this worksheet contains a model for evaluating new projects. In Part 1, we first list the key inputs used in the calculations. Part 2 goes on to calculate depreciation schedules for the building and for the equipment. Part 3 then determines the after-tax salvage values (i.e., net cash flows) that will come from disposing of the building and the equipment at the end of the project's life. Part 4 calculates the estimated cash flows over each year of the project's life. Part 5 then uses the estimated cash flows to estimate the key outputs, the project's NPV, IRR, MIRR, and Payback. Finally, in Parts 6 and 7, we consider the riskiness of the project by showing how changes in the inputs result in changes in the key outputs. Note that all dollars are shown in thousands; this is done for convenience. Identifying the relevant cash flows For a new project, the incremental cash flows can be divided into the following categories: initial investment outlay, operating cash flows over the project's life, and terminal year cash flows. The data used in the model were taken from the example in Chapter 11 of Fundamentals. In addition to the input data, we have included an excerpt from the MACRS Depreciation Schedule for 39-year (building) and 5-year (equipment) depreciation, and a table outlining the determination of net salvage values to be incorporated into our cash flow estimation. A B C D E F G H I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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Page 2 Table 11-1. Analysis of a New (Expansion) Project Part 1. Input Data (in thousands of dollars) Key Output: NPV = \$5,166 Building cost (= Depreciable basis) \$12,000 Equipment cost (= Depreciable basis) \$8,000 Market value of building in 2007 \$7,500 Net Operating WC \$6,000 Market value of equip. in 2007 \$2,000 First year sales (in units) 20,000 Tax rate 40% Growth rate in units sold 0.0% WACC 12% Sales price per unit \$3.00 Inflation: growth in sales price 0.0% Variable cost per unit \$2.10 Inflation: growth in VC per unit 0.0% Fixed costs \$8,000 Inflation: growth in fixed costs 0.0% Years Cumulative 1 2 3 4 Deprn Building Deprn Rate 1.3% 2.6% 2.6% 2.6% Building Deprn \$156 \$312 \$312 \$312 \$1,092 Ending Book Val: Cost - Cum. Deprn 11,844 11,532 11,220 \$10,908 Equipment Deprn Rate 20.0% 32.0% 19.0% 12.0% Equipment Deprn \$1,600 \$2,560 \$1,520 \$960 \$6,640 Ending Book Val: Cost - Cum. Deprn 6,400 3,840 2,320 \$1,360 to determine the depreciation expense for the year. See Web Appendix 11A for a review of MACRS depreciation rates.
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11-Evaluating Capital Budgeting - 1 2 3 4 5 6 7 8 9 10 11...

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