1 npv rm93044 accept the project problem 1b project

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Unformatted text preview: mation: For the same project, suppose we can only get RM100,000 for the old equipment after year 3, due to rapidly changing technology. Calculate the IRR and NPV for the project. Is it still acceptable? Problem 1b Terminal Cash Flow: Salvage value +/- Tax effects of capital gain/loss + Recapture of net working capital Terminal Cash Flow Problem 1b Terminal Cash Flow: Salvage value = RM100,000. Book value = depreciable asset - total amount depreciated. Book value = RM168,000. Capital loss = SV - BV = (RM68,000). Tax refund = 68,000 x .34 = RM23,120. Problem 1b Terminal Cash Flow: Terminal 100,000 100,000 23,120 23,120 25,000 148,120 148,120 Salvage value Tax on capital loss Recapture of NWC Terminal Cash Flow Problem 1b Solution NPV and IRR: CF(0) = -445,000. CF(1), (2) = 160,560. CF(3) = 160,560 + 148,120 = 308,680. Discount rate = 12%. IRR = 17.3%. NPV = RM46,067. Accept the project! Problem 2 Automation Project: Cost of equipment = RM550,000. Shipping & installation will be RM25,000. RM15,000 in net working capital required at setup. 8-year project life, 5-year class life. Simplified straight line depreciation. Current operating expenses are RM640,000 /yr. New operating expenses will be RM400,000 /yr. Already paid consultant RM25,000 for analysis. Salvage value after year 8 is RM40,000. Cost of capital = 14%, marginal tax rate = 34%. Problem 2 Initial Outlay: (550,000) + (25,000) (575,000) + (15,000) (590,000) Cost of new machine Shipping & installation Depreciable asset NWC investment Net Initial Outlay For Years 1 - 5: Problem 2 640,000 – 400,000 240,000 (115,000) 125,000 (42,500) 82,500 115,000 197,500 = Cost decrease Depreciation increase EBIT Taxes (34%) 550,000 + 25,000 EAT 5 Depreciation reversal Annual Cash Flow For Years 6 - 8: Problem 2 640,000 – 400,000 240,000 ( Cost decrease 0) 240,000 (81,600) 158,400 0 158,400 = Depreciation increase EBIT Taxes (34%) EAT Depreciation reversal Annual Cash Flow Problem 2 Terminal Cash Flow: 40,000 (13,600) 15,000 41,400 Salvage value Salvage Tax on capital gain Tax Recapture of NWC Recapture Terminal Cash Flow Terminal 34%(40,000) Problem 2 Solution NPV and IRR: CF(0) = -590,000. CF(1 - 5) = 197,500. CF(6 - 7) = 1...
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