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Capital Budgeting & Performance Measurement (1)

Capital Budgeting & Performance Measurement (1) - 1...

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1. The total-project approach is used to calculate the net present value of the decision to replace forklifts with the Automated Material Handling System based on the original estimates Michael Crow provided. The net present value is very positive in the amount of $743,006. Therefore, it is advantageous for Heat and Go to invest in the new AMHS. Investment in Automated Material Handling System Present Value Relevant Discount Total Cash Factors Present Flows 8% Value Initial AMHS Investment $(4,500,500) 1.000 $(4,500,500) Initial working capital investment (1,100,000) 1.000 (1,100,000) Proceeds from disposal of forklift 75,000 1.000 75,000 Tax shield created by CCA* 1,345,766 1.000 1,345,766 Recurring operating cash flows** 705,000 5.747 4,051,635 Proceeds from disposal of AMHS 750,000 0.540 405,000 Tax shield loss because of disposal*** (236,842) 0.540 (127,895) Recovery of working capital 1,100,000 0.540 594,000 Net Present Value $743,006 *($4,500,500 - $75,000 x .40) x (0.3/(0.3 + 0.08)) x ((2 + 0.08)/(2(1 + 0.08))) = $1,345,766 **$1,175,000 x (1 - 0.4) = $705,000. Recurring cash operating flows equal: Increase in cash flow from higher sales revenue $725,000 Reduction in annual manufacturing costs over current costs 420,000
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