Lecture 9- Capital Budgeting Part 2

Lecture 9- Capital Budgeting Part 2 - Capital Budgeting...

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Capital Budgeting Example #1 Your firm is considering buying a new machine for $120,000. It has a useful life of 4 years and an estimated salvage value of $40,000. The machine falls in asset class 8 with a CCA rate of 20%. The asset class will always remain open. Incremental revenues are expected to be $80,000 per year and incremental expenses are expected to be $30,000. The firm’s tax rate is 40% and the cost of capital is 10%. What is the NPV of this project?
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Example #1 with Straight Line Depreciation Same example as before, but now the CCA is calculated on a straight line depreciation basis to zero over 3 years. All other numbers remain the same.
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Example #2 You project cash flow (sales – cash expenses) from your new cockroach trap for each of the next 3 years as follows: Year 1 2 3 Cash Flow $100,000 130,000 $150,000 You will need to invest $200,000 in new machinery. It falls in asset class 9 with a CCA rate of 25% and has no salvage value at the end of the third year. An initial investment of $20,000 in NWC is required at time zero.
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This note was uploaded on 03/15/2010 for the course BUSINESS MGT200 taught by Professor Manjuris during the Spring '08 term at Ryerson.

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Lecture 9- Capital Budgeting Part 2 - Capital Budgeting...

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