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  • Capital Budgetng

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    Sufian Ahmad
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    This document summarizes the initial investment costs, cash flows, and net present value analysis of a potential new asset purchase. The initial investment is $684,800. The projected cash flows over 4 years are provided for both the new and old assets. The incremental cash flows from the new asset are positive each year. Using a discount rate of 10% or higher, the net present value is positive, therefore the project should be accepted. The internal rate of return is calculated to be 19.56% which exceeds the cost of capital, further supporting accepting the project.

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    Advanced Level Capital budgeting Queston with Excel solution

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    This document summarizes the initial investment costs, cash flows, and net present value analysis of a potential new asset purchase. The initial investment is $684,800. The projected cash flows over 4 years are provided for both the new and old assets. The incremental cash flows from the new asset are positive each year. Using a discount rate of 10% or higher, the net present value is positive, therefore the project should be accepted. The internal rate of return is calculated to be 19.56% which exceeds the cost of capital, further supporting accepting the project.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as xlsx, pdf, or txt
    7 views8 pages

    Capital Budgetng

    Uploaded by

    Sufian Ahmad
    This document summarizes the initial investment costs, cash flows, and net present value analysis of a potential new asset purchase. The initial investment is $684,800. The projected cash flows over 4 years are provided for both the new and old assets. The incremental cash flows from the new asset are positive each year. Using a discount rate of 10% or higher, the net present value is positive, therefore the project should be accepted. The internal rate of return is calculated to be 19.56% which exceeds the cost of capital, further supporting accepting the project.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as xlsx, pdf, or txt
    of 8

    Initial Investment

    Cost of New Asset 110000


    Less After tax proceeds from sale of old asset 53520
    NWC 12000
    68480

    OCF From New


    1 2 3 4
    EBITD 43000 43000 43000 43000
    Dep Exp 22000 35200 20900 13200
    EBIT 21000 7800 22100 29800
    Tax@40% 8400 3120 8840 11920
    NOPAT 12600 4680 13260 17880
    Add Dep 22000 35200 20900 13200
    OCF 34600 39880 34160 31080

    OCF From Old


    1 2 3 4
    EBITD 26000 24000 22000 20000
    Dep Exp 11400 7200 7200 3000
    EBIT 14600 16800 14800 17000
    Tax@40% 5840 6720 5920 6800
    NOPAT 8760 10080 8880 10200
    Add Dep 11400 7200 7200 3000
    OCF 20160 17280 16080 13200

    Incremental OCF 14440 22600 18080 17880

    Terminal CF (New)

    Less After tax proceeds from sale of new asset 19600


    NWC 12000
    31600

    NPV
    Time Periods 0 1 2 3 4
    Cash Flows 68480 14440 22600 18080 17880
    PV (At 10% cost of capital) 68480 13127 18678 13584 12212

    Total cash Inflow 89814


    Total cash outflow 68480
    NPV 21334 Accepted (NPV=Total Inflow - Total Outflows)
    IRR (Trial and Error method)
    Time Periods 0 1 2 3 4
    Cash Flows 68480 14440 22600 18080 17880
    PV (at 18% rate of return) 68480 12237 16231 11004 9222

    Total cash Inflow 71372


    Total cash outflow 68480
    NPV 2892

    Time Periods 0 1 2 3 4
    Cash Flows 68480 14440 22600 18080 17880
    PV (at 20% rate of return) 68480 12033 15694 10463 8623

    Total cash Inflow 67663


    Total cash outflow 68480
    NPV -817

    0.18
    IRR= Lower %+[(Higher%-Lower
    0.02 %)*(positive value/(Positiive Value-
    2892 Negative Value))]
    3709
    IRR 19.56% If cost of capital is less than 19.56%, Accept this project
    Market Value 70000
    Less: Tax @ 40% 16480
    After tax Proceeds 53520

    Market Value 70000


    Less: BV 28800
    gain 41200
    5 6 Tax@40% 16480
    43000
    13200 5500 Cost of old 60000
    29800 -5500 Less: Acc. Dep 31200
    11920 -2200 BV 28800
    17880 -3300
    13200 5500
    31080 2200

    5
    18000

    18000
    7200
    10800
    0
    10800 20160 17280 16080 13200 10800

    20280
    Working
    Market Value 29000
    Less: Tax @ 40% 9400
    After tax Proceeds 19600

    Market Value 29000


    Less: BV 5500
    gain 23500
    Tax@40% 9400

    5 Cost of old 110000


    51880 Less: Acc. Dep 104500
    32213 PV=FV/(1+i)^n BV 5500

    flow - Total Outflows)


    5
    51880
    22677

    5
    51880
    20849

    pt this project

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