Chicagovalvecompany case

Chicagovalvecompany case - 1.:1)) ) 1) Total Initia

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1) the net investment outlay at year 0 Cost of standard petroleum valve systems $200,000  Cost of installing the equipment $12,500  Total $212,500  Initial cash flow at year 0 $212,500  2) depriciation tax saving in each year We calculate the depreciation expense in order to calculate taxes and profit  after tax  We add back depreciation (since depreciation is a non cash expense) to get after tax cash flow Year Base Depreciation 1 20.00% $212,500 $42,500 2 32.00% $212,500 $68,000 3 19.00% $212,500 $40,375 4 12.00% $212,500 $25,500 5 11.00% $212,500 $23,375 6 6.00% $212,500 $12,750 100.00% $212,500 After-Tax Cost Savings Lone star will have Annual saving of - $60,000  pre-tax This would increase the cash flow by $60,000   tax rate is 40% 40% $24,000  tax-deductions After tax cash flow would increase by  $36,000  3) The projects incremental cash flows 1. Explain the Inputs into: 1) the net investment outlay at year 0 2) depriciation tax saving in  each year of the projects economic life 3) the projects incremental cash flow depreciation allowed  (MACRS class-life of 5  years )
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Year Net Cash Flow 0 ($212,500) 1 $53,000  2 $63,200  3 $52,150  4 $46,200  5 $45,350  6 $41,100  7 $36,000  8 $36,000  WACC 11% Year  Net Cash flow Discount factor @ Discounted cash flow 11% 0 (212,500) 1 -212,500 1 53,000  0.9 47,748 2 63,200  0.81 51,295 3 52,150  0.73 38,132 4 46,200  0.66 30,433 5 45,350  0.59 26,913 6 41,100  0.53 21,974 7 36,000  0.48 17,340 8 36,000  0.43 15,621 NPV 36,955.100 NPV  36,955.100 Economic rationale behind NPV: NPV method  is most consistent with the goal of owner wealth maximization. NPV´s values: If NPV=0: the firm´s overall value will not change if the new project is adopted. If NPV>0: the firm´s overall value will increase. IF NPV<0: the firm´s overall value will decrease 2. What is the project’s NPV? Explain the economic rationale behind the NPV. Could the NPV  of this particular project be different for Lone Star Petroleum Company than for one of  Chicago Valve’s other potential customers? Explain. A project´s NPV is the $ amount of change in the value of the firm as a result of undertaking the  project. (NPV of 0 means that cash flows  are just sufficient to repay invested capital and to provide the  required rate of return on capital )
Background image of page 2
NPV decision rules: For independent projects: accept/reject decision. Accept all independent projects having NPVs greater than or equal to 0. Reject all independent projects having NPVs less than 0. For mutually exclusive projects: ranking decision. Mutually exclusive projects having highest positive NPV will be ranked first, the second, etc. Project Year  Cash flow 0 (212,500) 1 53,000  2 63,200  3 52,150  4 46,200  5 45,350  6 41,100  7 36,000  8 36,000  IRR 16.20% Year  Cash flow Discount factor @ Discounted cash flow 16.2023% 0 (212,500) 1 -212,500 1 53,000  0.86 45,610 2 63,200  0.74 46,805 3 52,150  0.64 33,236 4 46,200  0.55 25,339 5 45,350  0.47 21,404 6 41,100  0.41 16,694 7 36,000  0.35 12,583 8 36,000  0.3 10,829 Could the NPV of this particular project be different for Lone Star Petroleum Company than  for one of Chicago Valve’s other potential customers?
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 20

Chicagovalvecompany case - 1.:1)) ) 1) Total Initia

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online