Capital Budgeting Problem 4/21/16 Kraemer Company is launching a new product. Th
ID: 2765716 • Letter: C
Question
Capital Budgeting Problem 4/21/16 Kraemer Company is launching a new product. The following information relates to the launch: 1) 4 year project life 8) Sales for first year $200,000 2) New equipment cost $(200,000) 9) Sales increase per year 5% 3) Equipment ship & install cost $(35,000) 10) Operating cost: $(120,000) 4) Related start up cost $(5,000) as a percent of sales 60% 5) Inventory increase $25,000 11) Depreciation expense - SL $(60,000) 6) Accounts Payable increase $5,000 12) Tax rate 40% 7) Equip. salvage value after tax $15,000 13) Hurdle Rate 10% Cash Flow Framework: Year 0 1 2 3 4 Investments: New Equipment cost -$200,000 Equipment ship & install cost -$35,000 Related start up cost -$5,000 Working Capital -$20,000 $20,000 Equip. Salvage value after tax $15,000 Total -$220,000 $- $- $- $20,000 Operations: Sales Operation Cost Depreciation Profit Tax Profit after tax Add, Depreciation Cash Flow Total Terminal: NPV $220,000 $32,738.20 Total Total Cash Flows $- $- $- $- $- NPV = IRR = Payback = PI = MIRR = Disc. Payback = Capital Budgeting Problem 4/21/16 Kraemer Company is launching a new product. The following information relates to the launch: 1) 4 year project life 8) Sales for first year $200,000 2) New equipment cost $(200,000) 9) Sales increase per year 5% 3) Equipment ship & install cost $(35,000) 10) Operating cost: $(120,000) 4) Related start up cost $(5,000) as a percent of sales 60% 5) Inventory increase $25,000 11) Depreciation expense - SL $(60,000) 6) Accounts Payable increase $5,000 12) Tax rate 40% 7) Equip. salvage value after tax $15,000 13) Hurdle Rate 10% Cash Flow Framework: Year 0 1 2 3 4 Investments: New Equipment cost -$200,000 Equipment ship & install cost -$35,000 Related start up cost -$5,000 Working Capital -$20,000 $20,000 Equip. Salvage value after tax $15,000 Total -$220,000 $- $- $- $20,000 Operations: Sales Operation Cost Depreciation Profit Tax Profit after tax Add, Depreciation Cash Flow Total Terminal: NPV $220,000 $32,738.20 Total Total Cash Flows $- $- $- $- $- NPV = IRR = Payback = PI = MIRR = Disc. Payback =Explanation / Answer
Kraemer Company Year 0 1 2 3 4 New Equipment cost $ (200,000.00) Equipment ship & installaton cost $ (35,000.00) Related start up cost $ (5,000.00) Salvage Value $ 15,000.00 Working capital $ (20,000.00) $ 20,000.00 Sales $ 200,000.00 $ 210,000.00 $ 220,500.00 $ 231,525.00 Operating Cost $ (120,000.00) $ (126,000.00) $ (132,300.00) $ (138,915.00) Depreciation $ (60,000.00) $ (60,000.00) $ (60,000.00) $ (60,000.00) Profit before tax $ 20,000.00 $ 24,000.00 $ 28,200.00 $ 32,610.00 Tax $ 8,000.00 $ 9,600.00 $ 11,280.00 $ 13,044.00 Profit after tax $ 12,000.00 $ 14,400.00 $ 16,920.00 $ 19,566.00 Depreciation $ 60,000.00 $ 60,000.00 $ 60,000.00 $ 60,000.00 Operating cash flow $ (260,000.00) $ 72,000.00 $ 74,400.00 $ 76,920.00 $ 114,566.00 P.V Factor $ 1.00 $ 0.91 $ 0.83 $ 0.75 $ 0.68 P.V. $ (260,000.00) $ 65,454.48 $ 61,487.88 $ 57,790.77 $ 78,249.72 NPV $ 2,982.85 IRR 10% P.I Sum of Discounted Cash Flows/Present value of cash outflows -1.011 Payback Year Cash flow Cumulative Cash flow 0 $ (260,000.00) $ (260,000.00) 1 $ 72,000.00 $ (188,000.00) 2 $ 74,400.00 $ (113,600.00) 3 $ 76,920.00 $ (36,680.00) 4 $ 114,566.00 $ 77,886.00 3.32 Years Discounted Cash flow Year Discounted Cash flow 0 $ (260,000.00) $ (260,000.00) 1 $ 65,454.48 $ (194,545.52) 2 $ 61,487.88 $ (133,057.64) 3 $ 57,790.77 $ (75,266.87) 4 $ 78,249.72 $ 2,982.85 3.96 Years MIRR= 4%
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