Eng 111 - Week 4 Discussion

Eng 111 - Week 4 Discussion - Net Cash Flow Fill in the...

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Discussion Sheet 3 10/21/2011 Week 4: Valuation Techniques, Capital Budgeting TA: Ravichandran Ramakrishnan The following example will illustrate various capital budgeting techniques and their associated advantages and disadvantages. Example Corporation want to expand its computer business. To do this it will use a factory it owns, which can be leased for $10 each year. It needs to purchase a fabrication machine which costs $200 and has a $20 depreciation expense each year for 5 years of total asset life. All other values are given in the table. Year: 0 1 2 3 4 Investment: Fixed Capital Investment -200 Opportunity Cost Net Working Capital 10 20 25 35 35 Delta NWC Total Cash Flow of Investment Income: Sales Revenue 0 200 250 270 250 2 Operating Costs 0 100 120 150 150 1 Depreciation 0 Income Before Taxes 0 Tax (20%) 0 Net Income 0 Cash Flow from Op
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Unformatted text preview: Net Cash Flow Fill in the table and calculate the present value and PI using a discount rate of 10%. What numbers would you use to calculate this value? Would you accept this project? Example Corporation can enter a contract with another computing firm. Example Corp will initially pay this firm 10$ and the other firm will pay Example Corp. $5 every year for five years. In the last year the firm will payback the initial deposit of $10. However a condition of the deal is that Example Corp. will not expand its computer business. The IRR for the above project is 11%. The IRR of the deal offered is 50%. Which deal should I take based on the IRR rule? Does this make sense? What else should we use to evaluate this decision?...
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