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

Cash Flow Budget for the project and its NPV :

{1}	{2}	{3}	{4} = {3}*50%	{5}	{6} = {3}-{4}-{5}	{7} = {6}*35%	{8} = {6}-{7}	{9}	{10}	{11} = {2} + {8} + {5} + {9} + {10}		{12}	{13} = {11}*{12}
Year	Initial Investment	New Sales	Cost of Goods Sold	Depreciation	Profit before tax	Tax @ 35%	Profit after tax	Net Working Capital	After tax salavge Value	Net Cash Flow	DF Working	Discounting Factor	Present value
0	(100,000)	-	-	-	-	-	-	(3,000)	-	(103,000)	1	1	-103000
1		170,000	85,000	25,000	60,000	21,000	39,000	-	-	64,000	1/1.12^1	0.892857143	57142.85714
2		170,000	85,000	25,000	60,000	21,000	39,000	-	-	64,000	1/1.12^2	0.797193878	51020.40816
3		170,000	85,000	25,000	60,000	21,000	39,000	3,000	-	67,000	1/1.12^3	0.711780248	47689.2766
4		-	-	25,000	(25,000)	(8,750)	(16,250)	-	32,500	41,250	1/1.12^4	0.635518078	26215.12073
												NPV:	79067.66264