CapitalBudgeting

# CapitalBudgeting - CapitalBudgeting:CashFlowsandRisk...

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Capital Budgeting: Cash Flows and Risk FINC 3630 Yost Capital Budgeting: Cash Flows and Risk Relevant Incremental Cash Flows Project Free Cash Flows = NOPAT + Depreciation–Gross Investment in Fixed Operating Assets – Investment in Operating Working Capital = EBIT (1–t) + Depreciation Gross Investment in Fixed Operating Assets–( Operating Current Assets ‐ ∆ Operating Current Liabilities) Relevant Incremental Cash Flows Shipping and Installation Noncash Items Interest Expense Sunk Costs Opportunity Costs Externalities (product cannibalization)

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Capital Budgeting: Cash Flows and Risk FINC 3630 Yost Depreciation Straight line MACRS Straight Line Depreciation You purchase a machine for \$20,000, which has a depreciable life of 5 years. What is the annual depreciation expense? If you sell the machine at the end of the year 4 for \$5,000, what is the after tax salvage value if the firm’s tax rate is 40 percent? MACRS Depreciation Half year convention Table 13 2
Capital Budgeting: Cash Flows and Risk FINC 3630 Yost MACRS Depreciation Asset Class Year 3 5 1 33% 20% 2 45% 32% 3 15% 19% 4 7% 12% 5 11% 66 % MACRS Depreciation You purchase a machine for \$80,000, which is in the 3 year asset class. The machine costs an additional \$20,000 in delivery and installation. Create a depreciation schedule. If you sell the machine at the end of year 3 for \$5,000, what is the after tax salvage value if the firm’s tax rate is 40 percent? Example #1 Bridgewell Industries is evaluating the option of purchasing a fork-lift truck costing \$60,000. If purchased, the truck will replace 4 workers, each with an average annual salary of \$15 000 However an experienced fork lift operator will of \$15,000. However, an experienced fork-lift operator will have to be hired at a salary of \$20,000 per year. Fuel and maintenance expense is expected to be \$10,000 per year. At the end of its 5-year life, the truck will have a market value of \$10,000. Bridgewell uses straight-line depreciation and depreciates the asset to \$0, assigns a 10% required rate of return for this type of investment, and has a marginal tax rate of 40%. Should the fork-lift truck be purchased?

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## This note was uploaded on 12/11/2011 for the course FINC 3630 taught by Professor Jensen,m during the Summer '08 term at Auburn University.

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CapitalBudgeting - CapitalBudgeting:CashFlowsandRisk...

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