Question

3. Capital Budgeting. (15 points) Ephemeral Industries is considering a new capital budgeting project that will last for three years. Ephemeral plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following information. The project is expected to produce $170,000 in new sales for the 3 operating years. Cost of Goods sold is 50% of revenues. The project entails the purchase of a capital asset for $90,000 that will cost $10,000 to be shipped and installed. The asset will be depreciated using a straight line 4-year schedule. The firm’s marginal tax rate is 35%. The project requires an increase in NWC in the first year of operations of $3,000 which will be reduced to the original level in year 3. The asset will be sold for $50,000 in the fourth year. Complete the cashflow budget for this project.

Answer 1

Year	Working capital	Cost of new machine	Tax shield- depreciation	Sale of new machine	(Sales-cost) after tax	Net CF
0	-3000	-100000				-103000
1			8750		55250	64000
2			8750		55250	64000
3	3000		8750		55250	67000
4	0		8750	32500	0	41250

Workings

AutoSave © of HO- Book2 - Excel Sign in File Home Insert Draw Page Layout Formulas Data Review View Help O Tell me what you want to do = = Calibri 11 BI U - - - A À - A - = dan ab General E 3- $ - % 9 OSOS Conditional Format as Formatting Table Insert Delete - Format Share con AG T ZY U Sort & Find & Filter Select Paste LC Cell Styles Clipboard Font Alignment Number Styles Cells Editing D3 fir =35%*100000/4 Net CF Year Working capital Cost of new machine Tax shield- depreciation Sale of new machine (Sales-cost) after tax 1 20 -3000 =-90000-10000 3/1 42 5 3 6 4 =35%*100000/4 =35%*100000/4 =35%*100000/4 =35%*100000/4 =SUM(B2:F2) =(170000*50%)*(1-35%) =SUM(B3:F3) =(170000*50%)*(1-35%) =SUM(B4:F4) =(170000*50%)*(1-35%) =SUM(B5:F5) =SUM(B6:F6) 3000 0 =50000*(1-35%)