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Unformatted text preview: Problem Day: Capital Budgeting Housekeeping Items POW Quiz this week due Thursday at 5pm POW Reviews this Thu at 5pm and Fri at 8am Ch. 10 Reading Quiz due Monday morning at 8am Course email: Busm301@gmail.com TA Help session hours posted on Blackboard Todays Agenda EAA (Again) Net Working Capital Depreciation o Tax Shield Initial Outlay Capital Budgeting o Start to Finish EAA Problem Ms. Kardashian is considering her future options. Two alternatives have been isolated. Her discount rate is 12.5%. The Reggie Bush option has a net present value of $265,000 and a useful life of 5 years. The Kris Humphries option has a net present value of $97,500 and a useful life of 3 years. What is Kris Humphries Equivalent Annual Annuity? a. $40,943 b. $55,538 c. $62,826 EAA Problem Ms. Kardashian is considering her future options. Two alternatives have been isolated. Her discount rate is 12.5%. The Reggie Bush option has a net present value of $265,000 and a useful life of 5 years. The Kris Humphries option has a net present value of $97,500 and a useful life of 3 years. What is Kris Humphries Equivalent Annual Annuity? a. $40,943 b. $55,538 c. $74,426 PV = $97,500 I/YR = 12.5% N = 3 yrs FV = PMT = ? PMT = $40,943 EAA Problem Ms. Kardashian is considering her future options. Two alternatives have been isolated. Her discount rate is 12.5%. The Reggie Bush option has a net present value of $265,000 and a useful life of 5 years. The Kris Humphries option has a net present value of $97,500 and a useful life of 3 years. What Reggie Bushs Equivalent Annual Annuity? a. $40,943 b. $55,538 c. $74,426 PV = $265,000 I/YR = 12.5% N = 5 yrs FV = PMT = ? PMT = $74,426 STUFF YOU NEED TO KNOW WORKING CAPITAL Many projects require an increase in working capital (inventory, cash, A/R). The standard convention is that working capital (WC) is included in the calculation of initial outflow and is reversed at the end of the project. Increased WC is an outflow at t=0 and an inflow at the end of the project. The important thing to remember is the change Common Investment Cash Flows 0 1 2 3 4 . . . . . N cash outlays Free cash flows from operations terminal flows Depreciation Tax Shield Firm A Firm B EBITDA $100 $100 Depreciation (non cash)020 100 80 Tax @ 40%4032 Net Income 60 48 Depreciation. +0 +20 Cash flow $60 $68 Save $8 in taxes due to depreciation! Sale of Asset  Gain Einstein Printing is replacing an old printing press with a new one. The old press is being sold for $350,000 and it has a net book...
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This note was uploaded on 12/19/2011 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.
 Fall '11
 JimBrau
 Finance

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