Question

# A capital budgeting project is being considered for implementation. The asset is a 3-year MACRS class...

A capital budgeting project is being considered for implementation. The asset is a 3-year MACRS class asset with a four-year project life. The cost of the asset, and the first year revenue and operating cost projections are provided in the table below:

Price of Asset

 \$280,000.00 Freight / Installation \$20,000.00 Depreciation Schedule: Year 1 \$99,000.00 Year 2 \$135,000.00 Year 3 \$45,000.00 Year 4 \$21,000.00 Salvage Value \$30,000.00 Increase in NWC \$25,000.00 Revenues from project \$260,000.00 Operating Costs (excluding depreciation) \$115,000.00 Tax Rate 34% Required Rate of Return 12% Opportunity Cost - Sale of plant space \$100,000.00 Expected Annual Growth Project Revenue 4% Expected Annual increase in operating cost 8%

Using Based on these projections, complete the Project Cash Flow Table below to calculate the relevant after tax cash flows, and then calculate the NPV and the IRR for the project. Show your numbers in thousands (200.00 for 200,000, etc). Read the problem carefully and consider all the data, especially the annual growth in revenue and operating costs.

 Year 0 1 2 3 4 Total Revenues Operating Costs (exc. dep) Depreciation Earnings before taxes Taxes Net income Add back Depreciation Net operating cash flows Equipment Cost Installation Change in Net Working Capital Opportunity Cost of Project Salvage Value Tax on Salvage Value Return of NWC NET CASH FLOWS Q-1 Q-2 Q-3 Q-4 Q-5

Q- 6: I/YR = _________

Q – 7: Net Present Value = \$

Q – 8: IRR =

 Year 0 1 2 3 4 Total revenues \$260.00 \$270.40 \$281.22 \$292.46 Operating costs \$115.00 \$124.20 \$134.14 \$144.87 Depreciation \$99.00 \$135.00 \$45.00 \$21.00 Earnings before tax \$46.00 \$11.20 \$102.08 \$126.60 Taxes \$15.64 \$3.81 \$34.71 \$43.04 Net income \$30.36 \$7.39 \$67.37 \$83.55 Add back depreciatiom \$99.00 \$135.00 \$45.00 \$21.00 Net operating cash flows \$129.36 \$142.39 \$112.37 \$104.55 Equipment cost -\$280.00 Installation -\$20.00 Change in NWC -\$25.00 Opportunity cost of project -\$100.00 Salavge value \$30.00 Tax on salvage value \$10.20 Return of NWC \$25.00 Net cash flows -\$425.00 \$129.36 \$142.39 \$112.37 \$149.35 cost of capital \$1.00 \$0.89 \$0.80 \$0.71 \$0.64 PV of cash flows -\$425.00 \$115.50 \$113.51 \$79.98 \$94.92 NPV -\$21.08 IRR 10%

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