a. Cost of capital for the project: |
Before-tax Cost of debt=RFR+Debt Beta*Market risk premium) |
ie.4.6%+(0.25*(10.6%-4.6%))= |
6.10% |
After-tax cost of debt=Before-tax cost*(1-Tax rate) |
ie. 6.10%*(1-30%)= |
4.27% |
Cost of equity=RFR+(Equity Beta*Market Risk premium) |
ie.4.6%+(1.5*(10.6%-4.6%))= |
13.6% |
Weighted av.Cost of capital=( Wt.d*kd)+(Wt. e*ke) |
ie.(6/(16+6))*4.27%)+(16/(16+6))*13.6%)= |
11.06% |
Year | 0 | 1 | 2 | 3 | 4 | 5 |
1.Capital cost+Installation | -400000 | |||||
2.After-tax salvage of old equipment(90000-((90000-50000)*30%)) | 78000 | |||||
3.NWC introduced & recovered(40000+50000-25000) | -65000 | 65000 | ||||
4. CAPEX & NWC cash flows | -387000 | 0 | 0 | 0 | 0 | 65000 |
Operating cash flows | ||||||
5.Selling price/unit | 12 | 12 | 12 | 12 | 12 | |
6.Cost/unit | 8 | 8 | 8 | 9 | 10 | |
7.Net revenue/unit(5-6) | 4 | 4 | 4 | 3 | 2 | |
8.No.of units to be sold | 80000 | 100000 | 120000 | 100000 | 100000 | |
9.Total net revenues(7*8) | 320000 | 400000 | 480000 | 300000 | 200000 | |
10.Marketing costs | -50000 | -40000 | -40000 | -40000 | -40000 | |
11.Survey cost | -30000 | |||||
12.Manager's salary(40000*2) | -80000 | -80000 | -80000 | -80000 | -80000 | |
13.St.line depn.on new m/c(400000/5) | -80000 | -80000 | -80000 | -80000 | -80000 | |
14.Before-tax income(sum9--13) | 80000 | 200000 | 280000 | 100000 | 0 | |
15.Tax at 30%(14*30%) | -24000 | -60000 | -84000 | -30000 | 0 | |
16.After-tax income(14-15) | 56000 | 140000 | 196000 | 70000 | 0 | |
17.Add Back: Depn.(Row 13) | 80000 | 80000 | 80000 | 80000 | 80000 | |
18.Annual Operating cash flow(16+17) | 136000 | 220000 | 276000 | 150000 | 80000 | |
19.After-tax Installation expenses(50000*(1-30%)) | -35000 | |||||
20.Depn. Tax shield lost on Old m/c(50000*30%) | -15000 | |||||
21.Net annual cash flows(4+18+19+20) | -422000 | 121000 | 220000 | 276000 | 150000 | 145000 |
22. PV F at 11.06%(1/1.1106^Yr.n) | 1 | 0.90041 | 0.81075 | 0.73001 | 0.65731 | 0.59185 |
23. PV at 11.06%(21*22) | -422000 | 108950.12 | 178364.06 | 201481.92 | 98596.29 | 85818.25 |
24. NPV(Sum of Row 23) | 251210.63 | |||||
1.Allocated overhead costs of parent company will be excluded , as they are not incremental in nature ,ie. The company will continue to incur them , irrespective of the project. | ||||||
2. Because of the project, 2 new managers are going to be hired at $ 40000 each, making an incremental cash outflow of $ 80000 (before-tax) to the company.Hence they are included. | ||||||
DECISION RULE: Project can be accepted as it gives POSITIVE NPV | ||||||
c...25.IRR (Of Row 21) | 32% |
ASSIGNMENT 1 Burton is a small manufacturing company that makes furniture. They are considering a project...
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A firm is considering an expansion project that will last three years. The project requires an immediate purchase of a new equipment that costs $900,000. The equipment will be fully depreciated using straight-line method over the next three years. The resale price of the equipment at the end of year three is estimated to be $200,000. The project will generate annual sales of $750,000 and incur annual costs (all costs except depreciation expense) of $200,000 for each of the next...
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(1) A firm is considering an expansion project that will last three years. The project requires an immediate purchase of a new equipment that costs $900,000. The equipment will be fully depreciated using straight-line method over the next three years. The resale price of the equipment at the end of year three is estimated to be $200,000. The project will generate annual sales of $750,000 and incur annual costs (all costs except depreciation expense) of $200,000 for each of the...
Consider the case of Marston Manufacturing Company: Marston Manufacturing Company is considering a project that requires an investment in new equipment of $3,570,000. Under the new tax law, the equipment is eligible for 100% bonus depreciation at t = 0 so the equipment will be fully depreciated at the time of purchase. Marston estimates that its accounts receivable and inventories need to increase by $680,000 to support the new project, some of which is financed by a $272,000 increase in...
XYZ Company is considering whether it is worth investing in a project requiring the purchase of new equipment. The cost of a new machine is $340,000, including shipping and installation. The project will increase annual revenues by $400,000 and annual costs by $100,000. The machine will be depreciated via straight-line depreciation for three years to a salvage value of $40,000. If the firm does this project, $30,000 in net working capital will be required and will be fully recaptured at...
Consider the case of Marston Manufacturing Company: Marston Manufacturing Company is considering a project that requires an investment in new equipment of $3,200,000, with an additional $160,000 in shipping and installation costs. Marston estimates that its accounts receivable and inventories need to increase by $640,000 to support the new project, some of which is financed by a $256,000 increase in spontaneous liabilities (accounts payable and accruals). The total cost of Marston's new equipment is and consists of the price of...
Consider the case of Marston Manufacturing Company: Marston Manufacturing Company is considering a project that requires an investment in new equipment of $3,780,000. Under the new tax law, the equipment is eligible for 100% bonus depreciation at t = 0 so the equipment will be fully depreciated at the time of purchase. Marston estimates that its accounts receivable and inventories need to increase by $720,000 to support the new project, some of which is financed by a $288,000 increase in...
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