When evaluating a project, the portion of the variable expenses that would be al
ID: 2736530 • Letter: W
Question
When evaluating a project, the portion of the variable expenses that would be allocated to the project should be: included as a cash outflow on an after tax basis by multiplying the expense by one minus the tax rate. included as a cash outflow on an after-tax basis by multiplying the expense by the tax rate. included as a cash outflow on a before-tax basis. A company has unlimited funds to invest at its discount rate. The company should invest in all projects having: a net present value equal to zero a net present value less than zero. a net present value greater than zero Briefly explain why do we add back depreciation while calculating free cash flow in capital budgeting process? Why do we focus on cash flows rather than accounting profits in making our capital budgeting decision? What are the drawbacks or deficiencies of the discounted payback period? Do you feel either the payback or discounted payback period should be used to determine whether to accept or reject any project? Why or why not? You are the Chief Finance officer of Wind Mills Corporation. You are considering following independent projects: project A; project B and project C. If the opportunity cost of capital on each projects is 12%. The expected annual cash flows from each project are as follows: Calculate the payback and discounted payback for each project and indicate if the project should be acceptedExplanation / Answer
Answer 30
It should be incuded in cashflow before tax basis, and later when we arives on operating profit, we deduct tax from operating profits.
Answer 31
It should invest all his funds when NPV is greater than Zero, because at that point only company will be at benefecial position.
Answer 32
When we calculate net profit depreciation is always deducted, as depreciaton impacts cash flow, but itself iis not a item of cash flow, hence we add back depreciatin while calcualting cash flow.
Answer 33
We focus on cash flows rather than accounting profits while making our capital budgeting decissions because we account for time valuen of money or for investing decisions, we also apply discounting factor to calulate present values, which can be done on cash flows rather than profits, cash flows are easy to forecast than profits, hence we focus on cashflows rather than profits.
Answer 35
Project A
Pay back period => Inital investment / cash floeper period .
=> 25000/12000
Pay back period of Project A => 2.08 years
Project B
Now,
4+ ( 14000 / 70000)
4 +0.2
Pay back period of Project B => 4.2 Years
DISCOUNTED PAYBACK PERIOD
Formula => A-1 + [ (Cost - Cumulative Present Value of Cash Flow (A-1) ) / Present value of Cash flow ]
where
A => Year in which the cumulative present value of cash flows from investment exceed the initial cost.
Project A
NPV => 43260 - 25000 => 18260
So A=> 3
Discounted Pay back period => (3 -1) + [ ( 25000 - 20280) / 18260 ]
=> 2 + 0.258
Discounted Pay back period for Project A => 2.258 Years
PROJECT B
NPV => 82222 - 70000 => 12222
Discounted Pay back period => (5-1) + [ ( 70000 - 42532) / 12222 ]
=> 4 + 2.247
Discounted Pay back period for Project B => 6.247 Years.
Years CAsh Flows Cumm Cahs Flows 0 -70000 -70000 1 14000 -56000 2 14000 -42000 3 14000 -28000 4 14000 -14000 5 70000 56000Related Questions
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