03-PS9-KB_sol

03-PS9-KB_sol - rate of return • All operating flows...

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MIT Sloan School of Management J. Wang 15.407 E52-456 Fall 2003 Problem Set 9: Capital budgeting Due: December 9, 2003 1. The NPV calculation is: $ thousands 0 1 2 3 4 5 6 7 8 Sales 4200.0 4410.0 4603.5 4862.0 5105.1 5360.4 5628.4 5909.8 Man. Costs 3780.0 3969.0 4167.5 4375.8 4594.6 4824.3 3065.6 5318.8 Depreciation 120 120 120 120 120 120 120 120 Rent 100.0 104.0 108.2 112.5 117.0 121.7 126.5 131.6 Sale of Plant 400.00 BV of Plant 1200 1080 960 840 720 600 480 360 240 EBT 200.0 217.0 234.9 253.7 273.5 294.4 316.3 499.4 Taxes 70.0 76.0 82.2 88.8 95.7 103.0 110.7 174.8 Working Capital 350.0 420.0 441.0 463.1 486.2 510.5 536.0 562.8 0 Cashflow Inflow 4200.0 4410.0 4603.5 4862.0 5105.1 5360.4 5628.4 6309.8 Exp. w/o Dep. 3950.0 4149.0 4357.8 4577.1 4807.3 5049.0 5302.8 5625.2 Increase in W.C. 350.0 70.0 21.0 22.1 23.2 24.3 25.5 26.8 -562.8 Initial Investment 1200.0 Sales of Plant 400.0 Tax on Sale 56.0 Net Cash Flow -1550 180.0 240.1 250.6 261.8 273.5 285.8 298.8 1247.4 NPV 85.796 2. Assume the following: The firm will manufacture for at least 10 years There will be no inflation or technological change The 15 percent cost of capital is appropriate for all cash flows and is a real, after-tax
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Unformatted text preview: rate of return • All operating flows occur at the end of the year. • Depreciation follows the MACRS schedule in the textbook. Purchasing lids - The net present value of the after-tax cost is: NPV(purchase) =-10 X t =1 (2)(200000)(1-. 35) 1 . 15 t =-$1 , 304 , 880 1 Manufacturing lids - The cashflow schedule is shown below. Amounts are in hundred thousands. 1 2 3 4 5 6 7 8 9 10 Cost-3-3-3-3-3-3-3-3-3-3 Depreciation 0.21 0.37 0.26 0.19 0.13 0.13 0.13 0.07 Total Cost-3.21-3.37-3.26-3.19-3.13-3.13-3.13-3.07-3-3 Tax Shield-1.13-1.18-1.14-1.12-1.10-1.10-1.10-1.07-1.05-1.05 Investment-1.5 Δ Working Capital-.3 .3 Free Cash Flow-1.8-1.875-1.875-1.875-1.875-1.875-1.875-1.875-1.95-1.95-1.65 So, the net present value of the investment is -$1,118,328. The firm should make the lids. 2...
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03-PS9-KB_sol - rate of return • All operating flows...

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