Way its better to pick the largest npvs lets try

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Unformatted text preview: ts by NPV. Practice Problems: Practice Cash Flows & Other Topics Cash in Capital Budgeting in Problem 1a Project Information: Cost of equipment = RM400,000. Shipping & installation will be RM20,000. RM25,000 net working capital required at setup. 3-year project life, 5-year class life. Simplified straight line depreciation. Revenues will increase by RM220,000 per year. Defects costs will fall by RM10,000 per year. Operating costs will rise by RM30,000 per year. Salvage value after year 3 is RM200,000. Cost of capital = 12%, marginal tax rate = 34%. Problem 1a Problem Initial Outlay: (400,000) Cost of asset (400,000) + ( 20,000) Shipping & installation (420,000) Depreciable asset (420,000) + ( 25,000) Investment in NWC (RM445,000) Net Initial Outlay For Years 1 - 3: For 220,000 10,000 (30,000) (84,000) 116,000 (39,440) 76,560 84,000 160,560 = Problem 1a Increased revenue Decreased defects Increased operating costs Increased depreciation EBT 400,000+20,000 Taxes (34%) 5 EAT Depreciation reversal Annual Cash Flow Problem 1a Terminal Cash Flow: Salvage value +/- Tax effects of capital gain/loss + Recapture of net working capital Terminal Cash Flow Problem 1a Terminal Cash Flow: Salvage value = RM200,000. Book value = depreciable asset - total amount depreciated. Book value = RM168,000**. Capital gain = SV - BV = RM32,000. Tax payment = 32,000 x .34 = (RM10,880). ** 420,000 – (84,000 x 3YRS) Problem 1a Terminal Cash Flow: 200,000 (10,880) 25,000 214,120 Salvage value Tax on capital gain Recapture of NWC Terminal Cash Flow Problem 1a Solution NPV and IRR: CF(0) = -445,000 CF(1 ), (2) = 160,560 CF(3 ) = 160,560 + 214,120 = 374,680 Discount rate = 12% IRR = 22.1% NPV = RM93,044. Accept the project! Problem 1b Project Infor...
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This document was uploaded on 02/11/2014.

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