Review for FIN 110 - 1 Chapter 8 Capital budgeting techniques Net present value Accept the project if NPV is positive Reject the project if NPV is

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Chapter 8 Capital budgeting techniques Net present value; Accept the project if NPV is positive Reject the project if NPV is negative Payback period; Accept the project if the payback period is shorter than the company policy. Reject the project if the payback period is longer than the company policy IRR; Accept the project if the IRR is higher than cost of capital. Reject the project if the IRR is higher than cost of capital. Chapter 9 Review Straight line depreciation method is used Salvage value at the end of year 3 is $65,000 Investment classification = replacement No changes in sales Cash inflows are from cost reductions Cost reduction = $44,000 per year Initial investment at t=0 $126,000 Depreciable asset value = $120,500 Economic life of the project = 3 years Annual cost savings = $44,000 Salvage value=$65,000 Annual depreciation expense = ($120,500 - $65,000)/3 = $18,500 Incremental Income statement Income statement relevant to the project Increase in gross profit $44,000 Increase in depreciation -18,500 Increase in EBIT 25,500 Interest expenses XX Earnings before taxes 25,500 Increase in taxes (34%) -8,670 Increase in net income 16,830 Annual cash inflows = $16,830 + $18,500 = $35,530 1
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0 1 2 3 .____________.____________.__________. -$126,000 $35,530 $35,530 $35,530 salvage value 65,000 Net working capital 5,500 PV = 35,530 (PVIFA) 3, 12% + $70,500 (PVIF) 3, 12% = 85,343 + 50,196 = 135,539 NPV = $135,539 - $126,000 = $9,539 Accept the project Chapter 10: Cost of Capital K d = Interest rate on the firm’s debt K dt = K d (1-T) = After-tax cost of the firm’s debt K s = Cost of equity WACC = weighted average cost of capital K s = Cost of retained earnings (internal equity) K s = D 1 /P 0 + g K s = K rf + (K m – K rf ) β Chapter 11 Capital structure change; its impact on the cost of equity, weighted average cost of capital (WACC), and the firm value
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This note was uploaded on 05/20/2010 for the course DOF AAf001-6 taught by Professor Changchungdo during the Spring '10 term at 카이스트, 한국과학기술원.

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Review for FIN 110 - 1 Chapter 8 Capital budgeting techniques Net present value Accept the project if NPV is positive Reject the project if NPV is

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