Capital Budgeting Assignment

This assignment is a group project.

Shinyi Bookstores is planning to expand a new store. The financial manager, Ms. Lin is
preparing the following information for project analysis.
1. An initial cost for purchasing equipment for the expansion is (t = 0) $6 million. The
life of the equipment is four years, and will be depreciated over the period based on the
following rate:

period Depreciation rate

t=1 30%

t=2 43%

t=3 17%

t=4 7%

2. The initial working capital to be invested today for the expansion is $600,000. There
is not need to put more working capital during the operation. The working capital will
be recovered at the end of four years (t = 4).
3. The salvage value of the equipment is $200,000 at the end of the fourth year.
4. The company's operating costs, excluding depreciation, are expected to be 55 percent
of the company's annual sales.
5. The expansion will increase the company's dollar sales. The original sales were $12
million. After the expansion, the total sales of the bookstore will be:

period Total sales

t=1 $15 million

t=2 15.5

t=3 19

t=4 19.8

6. The company's tax rate is 38 percent. The new store will not affect current stores’
sales.
7. The bookstore current has a building leased out. The before tax rent (income) for the
building is $320,000 each year. The bookstore company plans to use this building for
the new store expansion.
8 The WACC for the project is 10.5 percent. Use this as the discount rate.
Questions:
a. What is the proposed project's NPV?
b. What is the project’s IRR?
c. What is the project’s payback period?
d. What is the project’s discounted payback period?
e. What is the project’s profitability index?
f. What if the cost of capital changes, the NPV of the project will be?
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42
rate
% % % % % % % % % % % % % % % % % % % % %
NP
V
g. Draw the NPV profile.