Day 20-Ch 12 Part 3-11.9.11

Day 20-Ch 12 Part 3-11.9.11 - BusinessManagement201 Day20

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Business Management 201 Day 20 Chapter 12: Capital Budgeting Grayson Products Sequel:  Mock POW #9 November 9, 2011
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Day 20 Agenda 1) Syllabus Changes—Posted on Blackboard 2) Ch 8 Reading Quiz Due Monday, Nov 14 at 8:00 AM 3) POW Quiz #9: Due Friday, Nov 11 at 11:59 PM 4) Book Assignments—Due November 28 5) Regular TA Review Session Schedule this Week TA Open Lab Session—Thursday 11:00 AM-12:00 PM in 3108 JKB TA POW Review Session—Thursday 5:00 PM-6:00 PM in 3714 HBLL TA Open Lab Session—Friday 11:00 AM-1:00 PM in 184 TNRB 1) Chapter 12: Capital Budgeting 2) Grayson Products Sequel Mock POW #9
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Chapter 12: Chapter 12: Cash Flows & Other Capital  Cash Flows & Other Capital  Budgeting Topics  Budgeting Topics 
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Capital Budgeting Overview Beginning Initial Outlay : Equipment Cost Shipping/Installation Maintenance Sales Tax Gain/Loss on Sale of  Old Equipment NWC Annual Operating Cash Flow Formula: OCF = (Sales – Costs)*(1-Tax Rate) + (Depreciation*Tax Rate) +/- Change in NWC Middle Annual Cash Flows  [Use Formula] Gain/Loss on Sale of  Old Equipment Potential Missed Old  Depreciation Change in NWC Ending Annual Cash Flow  ALL Terminal Cash  Flows : Gain/Loss on Sale of  Old Equipment Gain/Loss on Sale of  New Equipment Return of NWC Fixed Costs Variable Costs Annual Depreciation Tax Shield = Dep*Tax Rate Only Applies if NWC  changes with sales. Capitalize ONLY expenses  related to new project.
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Now We are Ready to  Now We are Ready to  Work Through an  Work Through an  Extended Capital  Extended Capital  Budgeting Example Budgeting Example
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Capital Budgeting Example Capital Budgeting:   the process of planning  for purchases of long-term  assets. Our firm must decide whether to purchase a  new plastic molding machine for  $220,000.   Main Questions to Consider How do we decide? Will the machine be profitable? Will our firm earn a high rate of return on  the investment?
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The cost of the new machine is  $220,000.   Installation will cost  $10,000. $10,000  in net working capital will be needed at the time of  installation. The project will  increase annual revenues  by  $125,000  per  year and  operating costs will increase  by  $45,000 . Simplified   straight line depreciation  is used. i.e. the firm will depreciate the machine to  $0 . The project will last  5 years. Realizable  salvage value   at year 5  =  $50,000 . 14%  cost of capital;  34%  marginal tax rate. Relevant Project Information:
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Capital Budgeting Overview Beginning Initial Outlay : Equipment Cost Shipping/Installation Maintenance Sales Tax Gain/Loss on Sale of  Old Equipment NWC Annual Operating Cash Flow Formula: OCF = (Sales – Costs)*(1-Tax Rate) + (Depreciation*Tax Rate) +/- Change in NWC Middle
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Day 20-Ch 12 Part 3-11.9.11 - BusinessManagement201 Day20

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