Capital Budgeting Solutions4

# Capital Budgeting Solutions4 - NPV =-\$500 \$450(1.10)1...

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Old Exam Questions - Capital Budgeting - Solutions Page 31 of 96 Pages NPV = -\$500 + \$450 / (1.10) 1 + \$470 / (1.10) 2 + \$470 / (1.10) 3 = \$650.64 NPV = -\$500.00 + \$409.09 + \$388.43 + \$353.12 = \$650.64 Alternatively, CF 0 = -\$500.00 CF 1 = \$450.00 CF 2 = \$470.00 CF 3 = \$470.00 I/YR = 10% Solve for NPV = \$650.64 27. Your company is considering replacing an existing piece of equipment. The company has collected the following information about the proposed replacement. (Note: You may or may not need to use all of this information, use only the information that is relevant.) The new equipment has a price (at Year 0) of \$1,000,000 and will be depreciated on a straight line basis over 8 years (Year 1-8). It will have a salvage value of \$400,000 at Year 8. The old machine was also being depreciated on a straight line basis. It has a book value (at Year 0) of \$200,000 and four more years left of depreciation (\$50,000 per year in Year 1-4) and a current salvage value (at Year 0) of \$300,000. If the company goes ahead with the replacement, it will have an effect on the company's net working capital. At Year 0, inventory will increase by \$50,000 and accounts payable will increase by \$20,000. At Year 8, the net working capital will be recovered after the project ends. The replacement machine, because of efficiencies, is expected to produce incremental EBIT of \$300,000 for each of the next 8 years (Year 1-8). The company's interest expense each year will be \$40,000 per year. The company's overall WACC is 12 percent. However, the proposed replacement project is more risky than the average project, leading the firm to use a WACC of 14 percent for this project. The company's tax rate is 40 percent. Determine the NPV for this project. A sample table is given to help you arrange the data.

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Old Exam Questions - Capital Budgeting - Solutions Page 32 of 96 Pages A. \$482,854.29 * B. \$593,818.82 C. \$561,183.73 D. \$513,363.57 E. \$548,494.94 CFj = -770,000 CFj = 255,000 NJ = 4 CFj = 305,000 NJ = 3 CFj = 575,000 I/YR = 14 Solve for NPV = \$593,818.82 28. Your company is considering a project that has the following cash flows (Note: the amount of the original investment at Year 0 is missing): Year Cash Flow 0 ? 1 \$2,000 2 3,000 3 3,000 4 4,500 Item Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Initial Outlay -\$1,000,000 EBIT \$300,000 \$300,000 \$300,000 \$300,000 \$300,000 \$300,000 \$300,000 \$300,000 Less Taxes -\$120,000 -\$120,000 -\$120,000 -\$120,000 -\$120,000 -\$120,000 -\$120,000 -\$120,000 Plus New Depreciation \$125,000 \$125,000 \$125,000 \$125,000 \$125,000 \$125,000 \$125,000 \$125,000 Less Old Depreciation -\$50,000 -\$50,000 -\$50,000 -\$50,000 Plus Salvage \$300,000 \$400,000 Less Tax on Salvage -\$40,000 -\$160,000 Less NWC -\$30,000 Plus Recapture of NWC \$30,000 Total Free Cash Flow -\$770,000 \$255,000 \$255,000 \$255,000
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Capital Budgeting Solutions4 - NPV =-\$500 \$450(1.10)1...

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