Question

Assignment Capital Budgeting problem with After-tax Cash Flows Bell Manufacturing is considering purchasing a new labeling machine. The equipment will cost $180,000 and have a 5-year useful life. Expected salvage value is $20,000. Tax regulations permit the following depreciation schedule: Percent Deductible Year 1 20% 2 32 3 19 4 15 14

Answer 1

a) After tax operating cash flows Depreciation(Wor king Note 1) Tax Savings on Cash Tax Savings on Net Cash Cash Savings Cash Expenses Tax payable@30% |Expenses@30% Depreciation @30% |Inflows Year 3 4-1*30% 5-2*30% 6=3*30% 7=1-2-4+5+6 1 2 122000 18000 36000 36600 5400 10800 83600 57600 4800 2 134000 16000 40200 17280 99880 34200 3 144000 26000 43200 7800 10260 92860 27000 36000 5400 120000 18000 8100 79500 10000 25200 28800 7560 5 96000 3000 67760 Working Note 1 Depreciation Amount Asset Value % Deductible Depreciation Year 20% 36000 180000 180000 32% 57600 2 19% 34200 3 180000 15% 4 180000 27000 180000 14% 5 25200 st

b) Payback Period Cash Inflows Year 1 83600 2 99880 92860 4 79500 5 67760 Amount invested 180000 Year 1 inflow 83600 Balance to be recovered (180000-83600)- 96400 Period-1+96400/99880 Period-1+0.97 Payback Period 1.97 Years

b) Net Present value Present value annuity Cash Inflows factor@4% Present value Year 0 -180000 1 -180000 0.962 1 83600 80385 2 99880 0.925 92345 3 92860 0.889 82552 67957 4 79500 0.855 55694 5 67760 0.822 198932 Net Present value

b) Profitability Index Present value annuity Cash Inflows factor@4% Present value Year 80385 1 83600 0.962 2 99880 0.925 92345 82552 3 92860 0.889 4 79500 0.855 67957 0.822 5 67760 55694 Net Present value 378932 Profitability Index = Net Present value OutFlow 378932 180000 2.11 3 Qualitative factors 1 Nature and size of expenditure 2 Lead time requirement 3 Availability of sources 4 Non recurring purchases 5 Size of the expenditure 6 Extent of negotiation