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FIN - Capital Budgeting Assignment Solution

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Question

Fixed manufacturing and overhead costs are estimated at $635,000 per year.;The machinery will cost $1,325,000, which cost will be depreciated for TAX PURPOSES as a seven year MACRS asset. Company management believes that the machinery can be sold for $500,000 at the end of the project.;Producing the new product will require an initial (Yr0) investment in Net Working Capital (NWC) of $ 1,100,000. During the project life annual NWC requirements are expected to be 25% of Sales. The company expects to recover 60% of its NWC project investments at the end of the project.;Assume a 40% aggregate tax rate and a required rate of return of 20%. Should the company undertake this project?;First prepare a Depreciation Schedule;Yr;Depreciation Expense;1;2;3;4;Next prepare projected Annual Income Statements;Yr1;Yr2;Sales;VC;FC;EBITDA;Depn;EBIT;Taxes @ 40%;NI;Calculate OCF;NI;+Depn;OCF;1;Book Value;Yr3;Yr4;Non-operating CFs;NWC Yr0;NWC Yr4;CAPEX (Capital Spending)(CS);CS Yr0;CS Yr4 (consider After-tax Salvage Value);Total Cash Flows (TCFs);Yr0;OCF;CS;NWC;Yr1;TCF;What is the project?s Payback (PB) period?;What is the project?s Net Present Value (NPV)?;What is the project?s IRR?;2;Yr2;Yr3;Yr4

 

Paper#23149 | Written in 18-Jul-2015

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