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 18). 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 14) 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 18).
•
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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View Full DocumentOld 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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 Spring '08
 Staff
 Depreciation, Net Present Value, Old Exam Questions

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