# Calculate the Net Cash Flow for the Purchase

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Calculate the Net Cash Flow for the Purchase document sample

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```							                      CHAPTER 10 PROBLEMS
CASH FLOWS AND OTHER TOPICS IN CAPITAL BUDGETING

PROBLEM 10-1
CAPITAL GAINS TAX

DATA
Purchase                                    30,000
Expected life                                   10
Salvage value                                    0
Depreciation                                 3,000
Selling price                               35,000
Tax rate                                       34%
Years from when purch                            5

A)
Taxes =
B)
Selling price                               25,000
Taxes =
C)
Selling price                               15,000
Taxes =
D)
Selling price                               12,000
Taxes =

PROBLEM 10-2
RELEVANT CASH FLOWS

DATA
New Sales                                25,000,000
Former customers % of sales                    20%

Relevant Sales Level

PROBLEM 10-3
CALCULATING FREE CASH FLOWS

DATA
Change in EBIT                             475,000

Page 1
Tax rate                                                   34%
Depreciation                                           100,000

Without
Project      With Project Change
Accounts Receivable                      45,000         63,000
Inventory                                65,000         80,000
Accounts Payable                         70,000         94,000

Calculating Free Cash Flows:
Change in EBIT
Less: Change in taxes
Plus: Change in depreciation
Less Change in net working capital
Less: Change in capital spending
Free cash Flows

PROBLEM 10-4
CALCULATING FREE CASH FLOWS

DATA
Change in EBIT                                         900,000
Tax rate                                                   34%
Depreciation                                           300,000

Without
Project      With Project Change
Accounts Receivable                      55,000         63,000
Inventory                                55,000         70,000
Accounts Payable                         90,000        106,000

Calculating Free Cash Flows:
Change in EBIT
Less: Change in taxes
Plus: Change in depreciation
Less Change in net working capital
Less: Change in capital spending
Free cash Flows

PROBLEM 10-5
CALCULATING OPERATING CASH FLOWS

Page 2
DATA
Revenues                   2,000,000
Cash expenses                800,000
Increase in depreciation     200,000
Tax rate                        0.34

Net Profit:
Revenues
Cash expenses
Depreciation
EBIT
Tax rate
Net income

Operating Cash Flows:
Change in EBIT
Change in Taxes
Change in depreciation
Operating Cash Flows

PROBLEM 10-6
CALCULATING OPERATING CASH FLOWS

DATA
Revenues                   3,000,000
Cash expenses                900,000
Increase in depreciation     400,000
Tax rate                        0.34

Net Profit:
Revenues
Cash expenses
Depreciation
EBIT
Tax rate
Net income

Operating Cash Flows:
Change in EBIT
Change in Taxes
Change in depreciation
Operating Cash Flows

Page 3
PROBLEM 10-7
CALCULATING OPERATING CASH FLOWS

DATA
Quantity                                  10,000
Years                                          10
Selling price                               \$100 each
Variable costs                                \$40 each
Fixed costs                             \$160,000
Initial expenditure                   \$1,000,000
Salvage value                                  \$0
Initial investment in working capital    \$50,000
Required rate of return                       10%
Tax rate                                     0.34

A)
Initial Outlay
Outflows:
Purchase price
Increased Inventory
Net Initial Outlay

B)
Annual Cash Flows (years 1-9)

Net Income:
Revenues
Cash expenses
Depreciation
EBIT
Tax rate
Net income

Free Cash Flows:
Change in EBIT
Change in taxes
Change in depreciation
Change in net working capital

C)

Page 4
Terminal Cash flow (year 10)
Inflows:
Free Cash flow in year 10
Recapture of working capital

D)
Present Value of Free Cash Flows
Years 1-9
Year 10
Less Initial Cost

Net Present Value

PROBLEM 10-8
CALCULATING OPERATING CASH FLOWS

DATA
Quantity                                   5,000
Years                                           5
Selling price                             \$1,000 each
Variable costs                              \$500 each
Fixed costs                           \$1,000,000
Initial expenditure                   \$5,000,000
Salvage value                                  \$0
Initial investment in working capital \$1,000,000
Required rate of return                       10%
Tax rate                                     0.34

A)
Initial Outlay
Outflows:
Purchase price
Increased Inventory
Net Initial Outlay

B)
Annual Cash Flows (years 1-5)

Net Income:
Revenues
Cash expenses

Page 5
Depreciation
EBIT
Tax rate
Net income

Free Cash Flows:
Change in EBIT
Change in taxes
Change in depreciation
Change in net working capital

C)
Terminal Cash flow (year 5)
Inflows:
Free Cash flow in year 5
Recapture of working capital

D)
Present Value of Free Cash Flows
Years 1-5
Year 5
Less Initial Cost

Net Present Value

PROBLEM 10-9
NEW PROJECT ANALYSIS

DATA
Change in EBIT                               35,000
Purchase Price                              100,000
Installation Fee                              5,000
Increase in Inventory                         5,000
Life                                             10
Salvage Value                                     0
Depreciation
Tax Rate                                       34%
Required rate of return                        15%

A)

Page 6
Outflows
Purchase Price
Installation Fee
Increased Working Inventory
Net Initial Outlay

B)
Differential Annual Free Cash Flows (Years 1-9)
Cash Flow
Change in EBIT
Change in taxes
Increased Depreciation
Project's Free Cash Flows

C)
Terminal Free Cash Flow (Year 10)

Inflows:
Free Cash Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow

D)
Present Value of Free Cash Flows
Years 1-9
Year 10
Less Initial Cost

Net Present Value

PROBLEM 10-10
NEW PROJECT ANALYSIS

DATA
Change in EBIT                                         150,000
Purchase Price                                         500,000
Training Session Fee                                    25,000
Installation Fee                                         5,000
Increase in Inventory                                   30,000
Life                                                        10
Salvage Value                                                0
Depreciation

Page 7
Tax Rate                                                   34%
Required rate of return                                    15%

A)
Outflows
Purchase Price
Training Session Fee
Installation Fee
Increased Working Inventory
Net Initial Outlay

B)
Differential Annnual Free Cash Flows (Years 1-9)
Cash Flow
Change in EBIT
Change in taxes
Change in depreciation
Project's Free Cash Flows

C)
Terminal Free Cash Flow (Year 10)

Inflows:
Free Cash Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow

D)
Present Value of Free Cash Flows
Years 1-9
Year 10
Less Initial Cost

Net Present Value

PROBLEM 10-11
NEW PROJECT ANALYSIS

DATA
Change in EBIT                                          50,000
Purchase Price                                         200,000
Training Session Fee                                     5,000

Page 8
Installation Fee                                         5,000
Increase in Inventory                                   20,000
Life                                                        10
Salvage Value                                                0
Interest payments                                        8,000
Depreciation
Tax Rate                                                   34%
Required rate of return                                    10%

A)
Outflows
Purchase Price
Training Session Fee
Installation Fee
Increased Working Inventory
Net Initial Outlay

B)
Differential Annnual Free Cash Flows (Years 1-9)
Cash Flow
Change in EBIT
Change in taxes
Change in depreciation
Project's Free Cash Flows

C)
Terminal Free Cash Flow (Year 10)

Inflows:
Free Cash Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow

D)
Present Value of Free Cash Flows
Years 1-9
Year 10
Less Initial Cost

Net Present Value

PROBLEM 10-12

Page 9
COMPREHENSIVE PROBLEM

DATA
Coxt of plant and equipment                          14,800,000
Shipping and installation                               200,000
Tax rate                                                    34%
Required rate of return                                     15%
Sales Price per unit (yrs 1-4)                              300
Sales Price per unit (yr 5)                                 250
Variable cost per unit                                      140
Annual fixed cost                                       700,000
Depreciation life                                             5

Section 1: Calculate EBIT
Year                                                              1         2
Units Sold                                                        70,000   120,000

Sales Revenue
Less: Variable Costs
Less: Fixed Costs
Equals: EBDIT
Less: Depreciation
Equals: EBIT
Taxes

Section 2: Calculate Operating Cash Flow
EBIT
Less: Taxes
Plus: Depreciation
Operating Cash Flow

Section 3: Calculate Net Working Capital
Revenue:
Initial Working Capital Requirement
Net Working Capital Needs:
Liquidation of Working Capital
Change in Working Capital:

Section 4: Calculate Free Cash Flow
Operating Cash Flow
Minus: Change in Net Working Capital
Minus: Change in Capital Spending

Page 10
Free Cash Flow:

PV =
NPV

Problem 10-13
COMPREHENSIVE PROBLEM

DATA
Coxt of plant and equipment                          6,900,000
Shipping and installation                              100,000
Tax rate                                                   34%
Required rate of return                                    15%
Sales Price per unit (yrs 1-4)                             250
Sales Price per unit (yr 5)                                200
Variable cost per unit                                     130
Annual fixed cost                                      300,000
Depreciation life                                            5

Section 1: Calculate EBIT
Year                                                             1         2
Units Sold                                                       80,000   100,000

Sales Revenue
Less: Variable Costs
Less: Fixed Costs
Equals: EBDIT
Less: Depreciation
Equals: EBIT
Taxes

Section 2: Calculate Operating Cash Flow
EBIT
Less: Taxes
Plus: Depreciation
Operating Cash Flow

Section 3: Calculate Net Working Capital
Revenue:
Initial Working Capital Requirement
Net Working Capital Needs:
Liquidation of Working Capital

Page 11
Change in Working Capital:

Section 4: Calculate Free Cash Flow
Operating Cash Flow
Minus: Change in Net Working Capital
Minus: Change in Capital Spending
Free Cash Flow:

PV =
NPV

PROBLEM 10-14

Project A        Project B
Initial outlay                        (10,000)         (10,000)
Year 1                                  5,000            6,000
Year 2                                  5,000            6,000
Year 3                                  5,000            6,000
Year 4                                  5,000            6,000
Year 5                                  5,000            6,000

req. rate of return=                     12%              15%

NPVa=
NPVb=

PROBLEM 10-15
RISK-ADJUSTED DISCOUNT RATES AND RISK CLASSES

Project A        Project B
Initial outlay                      (250,000)        (400,000)
1         30,000         135,000
2         40,000         135,000
3         50,000         135,000
4         90,000         135,000
5       130,000          135,000

required rate of returns=                                 12%     replacement
15%     modification
18%     unrelated project
20%     r&d

Page 12
NPVa=
NPVb=

MINI CASE

D)
DATA
Coxt of plant and equipment                          7,900,000
Shipping and installation                              100,000
Tax rate                                                   34%
Required rate of return                                    15%
Sales Price per unit (yrs 1-4)                             300
Sales Price per unit (yr 5)                                260
Variable cost per unit                                     180
Annual fixed cost                                      200,000
Depreciation life                                            5

Section 1: Calculate EBIT
Year                                                             1         2
Units Sold                                                       70,000   120,000

Sales Revenue
Less: Variable Costs
Less: Fixed Costs
Equals: EBDIT
Less: Depreciation
Equals: EBIT
Taxes

Section 2: Calculate Operating Cash Flow
EBIT
Less: Taxes
Plus: Depreciation
Operating Cash Flow

Section 3: Calculate Net Working Capital
Revenue:
Initial Working Capital Requirement
Net Working Capital Needs:
Liquidation of Working Capital
Change in Working Capital:

Page 13
Section 4: Calculate Free Cash Flow
Operating Cash Flow
Minus: Change in Net Working Capital
Minus: Change in Capital Spending
Free Cash Flow:

PV =
NPV
IRR =

Page 14
Page 15
Page 16
Page 17
Page 18
Page 19
Page 20
Page 21
Page 22
Page 23
3        4        5
120,000   80,000   70,000

Page 24
3        4        5
120,000   70,000   70,000

Page 25
Page 26
3        4        5
140,000   80,000   60,000

Page 27

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