Based on the inputs below prepare a capital budget analysts lord this Base Case

Question

Based on the inputs below prepare a capital budget analysts lord this Base Case using the Net Present Valuing eternal Rate of Return. Profitability Index and Payback in Years determining whether the project is feasible Please show your spreadsheet calculations and jour final determinations of "go" or "no go" on the project Inputs: WACC - the cost of capital (hurdle rat will be the current yield of the 10 Year U.S. Treasury Note as of Tuesday July S, 2016, plus TOO basis points. Project Investment Outlay. Year 0 - $400.000 Project Investment Life - 10 years Project Depreciation middot S40.000/year Project Salvage Value - $10.000 Working Capital Base of Annual Sales - 10% Expected inflation rate per year. Selling Price Per Unit - 5% Expected inflation rate per year. Manufacturing Cost per unit 3.5% Expected inflation rate per year. fixed operating costs per year 2.5% Project Tax Rate - 30% Units sold per sear 50.000 Selling Price per Unit, Year I middot $35 Fixed operating costs per year excluding depreciation - SI 50.000 Manufacturing costs per unit. Year I middot $25.20 Written Analysis: Write a brief presentation explaining your conclusion of "go" or "no go" for this Capital Budget Analysis. Your presentation should include the Cost of Capital and the Return on Investment. This presentation should summary/c the project's return prospects in relation to the capital invested.

Explanation / Answer

Caluclation of NPV,

discount rate = 10 yr treasury bond yeild as on 10.41 AM on 07/05/2016 + 7% = 1.39% + 7% = 8.39%

Caluclation of net cashflows every year,

operating profit

D =a-b-c

Caluclation of profitability index = PV of infows / PV of outflows = 1,423,034.23 / 400,000 = 3.5575

IRR is caluclated by me on trail and error basis IRR = 18.7544%

Payback period = 4 years + 92840.33 / 101507.9 = 4.88205 years

The project can be accepted in all ways because NPV is positive , Porfitability index is more than 1, IRR is more than cost of capital, payback period is also lesser.

NOTE - since it is an large solution it might have arthametical errors.

year Sales with inflation a manufacturing cost with inflation b fixed operating cost with inflation c

operating profit

D =a-b-c

Tax savings on depreciation Tax expense Net operating revenue = operating profit - tax expense Working capital base = 10% of sales Net cash inflow 1 50,000 * 35 = 1750,000 50000 * 25.2 = 1260000 150,000 = 340,000 40000*0.3 = 12000 340,000-12,000 = 328000 * 30% = 98400 340,000 - 98400 = 241,600 175,000 66,600 2 1837500 1304100 153750 379,650 40000*0.3 = 12000 379650-12000=367650*0.3 = 110295 269355 183750 85605 3 1929375 1349743 157594 422,038 40000*0.3 = 12000 123011 299027 192937 106090 4 2025844 1396984 161534 467,326 40000*0.3 = 12000 136598 330728 202584 128144 5 2127136 1445879 165572 515,685 40000*0.3 = 12000 151105 364580 212713 151867 6 2233493 1496485 169711 567,297 40000*0.3 = 12000 166589 400708 223349 177359 7 2345167 1548862 173954 622,351 40000*0.3 = 12000 183105 439246 234517 204729 8 2462426 1603072 178303 681,051 40000*0.3 = 12000 200715 480336 246243 234093 9 2585547 1659179 182760 743,608 40000*0.3 = 12000 219482 524126 258555 265571 10 2714824 1717251 187329 810,244 40000*0.3 = 12000 239473 570771 271482 299289

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.