50000 17000 4000 salvage value tax on capital gain

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Unformatted text preview: ) 4,000 Salvage value Tax on capital gain Recapture of NWC Terminal Cash Flow Step 1: Evaluate Cash Flows c) Terminal Cash Flow: What is the cash flow at the end of the project’s life? 50,000 (17,000) 4,000 37,000 Salvage value Tax on capital gain Recapture of NWC Terminal Cash Flow Project NPV: CF(0) = -151,000. CF(1 - 4) = 46,461. CF(5) = 46,461 + 37,000 = 83,461. Discount rate = 14%. NPV = RM27,721. We would accept the project. Capital Rationing Capital Suppose that you have evaluated five capital investment projects for your company. Suppose that the VP of Finance has given you a limited capital budget. How do you decide which projects to select? Capital Rationing Capital PROJECT 1 2 3 4 5 IRR 27% 24% 18% 15% 14% REQUIRED RATE OF RETURN IS 10% Capital Rationing You could rank the projects by IRR: Capital Rationing You could rank the projects by IRR: IRR 25% 20% 15% 10% 5% 1 RM Capital Rationing You could rank the projects by IRR: IRR 25% 20% 15% 10% 5% 1 2 RM Capital Rationing Capital You could rank the projects by IRR: IRR 25% 20% 15% 10% 5% 1 2 3 RM Capital Rationing You could rank the projects by IRR: IRR 25% 20% 15% 10% 5% 1 2 3 4 RM Capital Rationing You could rank the projects by IRR: IRR 25% 20% 15% 10% 5% 1 2 3 4 5 RM Capital Rationing You could rank the projects by IRR: IRR Our budget is limited so we accept only projects 1, 2, and 3. 25% 20% 15% 10% 5% RRR = 10% 1 2 3 4 RMX 5 RM Capital Rationing You could rank the projects by IRR: IRR Our budget is limited so we accept only projects 1, 2, and 3. 25% 20% 15% 10% 5% 1 2 3 RMX RM Capital Rationing Ranking projects by IRR is not always the best Ranking way to deal with a limited capital budget. way It’s better to pick the largest NPVs. Let’s try ranking projec...
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