Capital Budgeting Case Studies with solutions revised 2-1 PDF

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Capital Budgeting Case Studies with solutions revised 2-1...

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NPV and IRR Case Study TheEnorMa c hi neCompanyi se va l ua t i ngac a pi t a le xpe ndi t ur epr opos a lt ha tr e qui r e s a ni ni t i a li nve s t me ntof$9 9, 360andhaspr e di c t e dc as hi nflowsof$ 20, 00 0pe rye arf or8 ye ar s . I twi l lha venos al va geval ue . Re qui r ed: a .Us i ngar e qui r e dr a t eofr e t ur nof10 %, de t e r mi net hene tpr e s e ntva l ueoft he i nve s t me ntpr opos a l . b.De t e r mi net hepr opos a l ' si nt e r nalr a t eofr e t ur n. Ans we r : a .

I ni t i a li nv e s t me nt Annua lc a s hi nflo ws Ne tpr e s e ntva l ue

Pr e di c t e d PV ofCa s h Ca s hFl ows Ye a r ( s ) PV F a c t or Fl ows $ ( 9 9, 3 6 0 ) 0 1 . 0 0 0 $ ( 9 9, 3 6 0 ) 2 0 , 0 0 0 8 5 . 3 3 5 1 0 6 , 7 0 0 $7 , 3 4 0

b . Pr e s e ntva l uef ac t orofa na nnui t yof$ 1 . 00=$ 9 9 , 3 6 0 /$ 2 0, 0 0 0=4 . 9 6 8 Fr om t hea nnui t yt a bl e ,t he4 . 9 6 8f a c t ori sc l os e s tt ot he8 ye a rr ow a tt he1 2 %c ol umn.The r e f or e ,t he I RRi s1 2 %.

NPV Case Study EI FMa nuf a c t ur i ngCompa nyne e dst oo ve r ha uli t sdr i l lpr e s sorbuyane w one . Theov e r ha ula ndt he ne w ma c hi nea r ebot he s t i ma t e dt oha veafiveye a rl i f ee a c h.Thef a c t sha vebe e nga t he r e d,a ndt he ya r e a sf ol l ows :

Pur c ha s ePr i c e ,Ne w Cur r e ntbookva l ue Ove r ha ulne e de dnow Annua lc a s hope r a t i ngc os t s Cur r e nts a l va geva l ue S a l va geva l uei nfiveye a r s

Cur r e ntMa c hi ne Ne w Ma c hi ne $ 8 8 , 0 0 0 $ 1 1 0 , 0 0 0 3 3 , 0 0 0 4 4 , 0 0 0 7 7 , 0 0 0 4 4 , 0 0 0 2 2 , 0 0 0 5 , 5 0 0 2 2 , 0 0 0

Re qui r e d: Whi c ha l t e r na t i vei st hemos tde s i r a bl ewi t hac ur r e ntr e qui r e dr a t eofr e t ur nof2 0 %?Show c omput a t i ons , a nda s s umenot a x e s .

Ans we r :Pr e s e ntv a l ueo fk e e p i n gc ur r e nts y s t e m:

Ove r ha ul Annua lope r a t i onsc os t s S a l va geva l uea te nd Ne tpr e s e ntva l ue

Pr e di c t e d PV Fa c t or@ PV ofCa s h Ca s hFl ows Ye a r ( s ) 2 0 % Fl ows $ ( 4 4, 0 0 0 ) 0 1 . 0 0 0 $ ( 4 4 , 0 0 0 ) ( 7 7 , 0 0 0 ) 1 5 2 . 9 9 1 ( 2 3 0 , 3 0 7 ) 5 , 5 0 0 5 0 . 4 0 2 2 , 2 1 1 $ ( 2 72 , 0 9 6 )

Pr e s e ntv a l ueo fne ws y s t e m: Pr e di c t e d PV Fa c t or@ PV ofCa s h Ca s hFl ows Ye a r ( s ) 2 0 % Fl ows I nv e s t me nt $ ( 1 10 , 0 0 0 ) 0 1 . 0 0 0 $ ( 1 1 0 , 0 0 0) S a l va geva l ue ,ol d 2 2 , 0 0 0 0 1 . 0 0 0 2 2 , 0 0 0 Annua lope r a t i onc os t s ( 4 4 , 0 0 0 ) 1 5 2 . 9 9 1 ( 1 3 1 , 6 0 4 ) S a l va geva l uea te nd 2 2 , 0 0 0 5 0 . 4 0 2 8 , 8 4 4 Ne tpr e s e ntva l ue $ ( 2 10 , 7 6 0 ) Buyi ngt hene we qui pme nti st hemos tde s i r abl eby$ 6 1 , 3 3 6( $ 2 7 2, 0 9 6-$ 2 1 0 , 7 6 0 ) .

NPV and Payback Book&Bi bl eBooks t or ede s i r e st obuyane wc odi ngma c hi net ohe l pc ont r olbook i nve nt or i e s . Themac hi nes e l l sf or$3 6, 586andr e qui r e swor ki ngc api t alof$ 4, 000 . I t s e s t i ma t e dus e f ull i f ei sfiveye ar sandwi l lha veas al va geval ueof$ 4, 0 00. Re c ove r yof wor ki ngc api t a lwi l lbe$4, 00 0a tt hee ndofi t sus e f ull i f e . Annualc as hs a vi ngsf r om t he pur c has eoft hema c hi newi l lbe$10 , 000. Re qui r ed: a .Comput et hene tpr e s e ntval uea ta14% r e qui r e dr a t eofr e t ur n. b.De t e r mi net hepa yba c kpe r i odoft hei nve s t me nt . Ans we r : a .

I nv e s t me nt Wor ki ngc a pi t a lne e de d Annua lope r a t i ons Wor ki ngc a pi t a lr e t ur ne d S a l va geva l ue Ne tpr e s e ntva l ue

c.

Pr e di c t e d PV F a c t or@ PV ofCa s h Ca s hFl ows Ye a r ( s ) 1 4 % Fl ows $ ( 3 6, 5 8 6 ) 0 1 . 0 0 0 $ ( 3 6, 5 8 6 ) ( 4 , 0 0 0 ) 0 1 . 0 0 0 ( 4 , 0 0 0 ) 1 0 , 0 0 0 1 5 3 . 4 3 3 3 4 , 3 3 0 4 , 0 0 0 5 0 . 5 1 9 2 , 0 76 4 , 0 0 0 5 0 . 5 1 9 2 , 0 76 $ ( 2 , 1 0 4 )

Payback period = ($36,586 + $4,000)/$10,000 = 4.06 years.

Accrual Accounting Rate of Return and NPV Sally’s Bar is considering purchasing a new cooler. Purchase price is $300,000. An additional $25,000 will be spent on working capital, which will be recovered at the end of the life of the cooler. The cooler is expected to last for three years, with a salvage value of $30,000 at the end of it’s useful life. The machine is expected to create $125,000, $150,000 and $175,000 in cash savings in each of the three years respectfully. The company uses straight-line depreciation. Assume a 40% tax rate. a . Calculate the accrual accounting rate of return on the initial investment. b. Calculate the NPV for the investment assuming the company requires a 10% rate of return. Ans we r : a . AARR=I nci na vga nnua la f t e r t a xopi nc ome/Ne ti ni t i a li nve s t me nt De pr e c i a t i on= 2 7 0 , 0 00/3=9 0 , 0 0 0p/ y

Ca s hs a vi ngs De pr e c i a t i on Ope r a t i ngi nc ome Ta x( 4 0 %) Ne tI nc omea f t e rt a x

Yr 1 1 2 5 , 0 0 0 9 0 , 0 0 0 3 5 , 0 0 0 1 4 , 0 0 0 2 1 , 0 0 0

Yr2 1 5 0 , 0 0 0 9 0 , 0 0 0 6 0 , 0 0 0 2 4 , 0 0 0 3 6 , 0 0 0

Yr 3 1 7 5 , 0 0 0 9 0 , 0 0 0 8 5 , 0 0 0 3 4 , 0 0 0 5 1 , 0 0 0

( 2 1 , 0 0 0+3 6 , 0 0 0+5 1 , 0 0 0 )/3=3 6 , 0 0 0/3 2 5, 0 0 0=1 1 . % b . Ca s hFl ow I ni t i a lI n ve s t me nt Wor ki ngCa pi t a l Yr1–1 2 5 , 0 00 Yr2–1 5 0 , 0 00 Yr3–1 7 5 , 0 00 Re t ur nofwor ki ngc a pi t a l–2 5 , 0 0 0 S a l va geVa l ue-$ 3 0 , 0 0 0 NPV

PVF ac t or 1 . 0 1 . 0 0 . 9 0 91 0 . 8 2 64 0 . 7 5 13 0 . 7 5 1 3 0 . 7 5 1 3

1 1 3, 6 3 7 1 2 3, 9 6 0 1 3 1, 4 7 7 1 8 , 7 82 2 2 , 5 3 9 8 5 , 39 5

After Tax Cash Flows De c a de sLa bpl a nst opur c has eane w mac hi ne .Thec os toft hemac hi nei s$ 200 , 000a nd i se xpe c t e dt oha veaus e f ull i f eof5ye ar s .De pr e c i a t i oni sc a l c ul a t e dus i ngs t r a i ghtl i ne wi t hnos a l va geval ue .Sa vi ngsi nc a s hope r a t i ngc os t sar ee xpe c t e dt obe$60, 0 00pe r ye ar .Howe ve r ,addi t i onalwor ki ngc a pi t a lof$ 30, 0 00i sr e qui r e dt hr oughoutt hel i f eof t hema c hi ne ,butwi l lber e c ove r e da tt hee ndoft hemac hi ne ’ sus e f ull i f e .Att hee ndof l i f eoft hemac hi ne ,De c ade si sa bl et os e l lt hemac hi nef or$2 0, 000 .De c a de st axr a t ei s 4 0%.Thec ompanyus e ss t r a i ght l i nede pr e c i a t i on. a . Wha ti st heamountoft het ot ali ni t i ali nve s t me nt ? b.Wha ti st hene tc a s hi nflow f orye ar1? c .Wha ti st hene tc a s hi nflow f orye ar5? Ans we r : a .2 00, 00 0+30, 00 0=230, 0 00 b.Sa vi ngs 60, 0 00 Le s sDe pr e c i a t i on ( 2 00, 00 0/5) Ope r a t i ngI nc ome 2 0, 000 Le s st ax( 40%)

Ne tI nc ome 1 2, 000 Addbac kde pr e c i a t i on 4 0, 000 Ne tc a s hi nflow f orYr 1 5 2, 000 c . Sa vi ngs 6 0, 000 Le s sDe pr e c i a t i on ( 2 00, 00 0/5) Ope r a t i ngI nc ome 2 0, 000 Le s st ax( 40%)

Ne tI nc ome 1 2, 000 Addbac kde pr e c i a t i on 4 0, 000 Addbac kwor ki ngc api t al30, 00 0 Ca s hf r om di s pos alofe qui p ne toft a x 12 , 000 Ne tCa s hI nflow Yr5 9 4, 000...