# 5 Capital Budgeting

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```					           Data Section                                                   Data Section

Cash Outflows/Change in Depreciation                           Cash Outflows/Change in Depreciation

Cash Inflows                                                   Cash Inflows

T-Account of Cash Flows/MIRR                                   T-Account of Cash Flows/MIRR

Interpolation for IRR Calculations                             Interpolation for IRR Calculations

Payback Period                                                 Payback Period

Summary                                                        Summary

Data Section for 2nd Proposal                                   Data Section for 2nd Proposal
2nd Proposal

2nd Proposal
Cash Outflows (2nd)/Chg. In Depreciation (2nd)                  Cash Outflows/Change in Depreciation (2nd)

Cash Inflows                                                    Cash Inflows (2nd)

T-Account of Cash Flows/MIRR                                    T-Account of Cash Flows/MIRR (2nd)

Replacement Chains                                              Replacement Chains

NPV Profile Chart                                              NPV Profile Chart

Cash Flow Chart                                                Cash Flow Chart
nge in Depreciation

Flows/MIRR

R Calculations

for 2nd Proposal

s/Change in Depreciation (2nd)

(2nd)

Cash Flows/MIRR (2nd)

Chains
SUMMARY SECTION

Net Present Value
P.V. of Benefits - P.V. of Costs = Net Present Value
\$36,237      -                  30,625       =                   \$5,612

The benefits exceed the costs. You should BUY the asset.
Internal Rate of Return

Internal Rate of Return =                                                             20.58%

The IRR of 20.58% is greater than the discount rate (or required rate of return) of 12.0%.
Modified Internal Rate of Return

Modified Internal Rate of Return =                                                       16.81%

The MIRR of 16.81% is greater than the discount rate (or required rate of return) of 12.0%.
Payback Period

Payback Period =                                                                            2.51 years

You should buy the asset only if the firm's minimum desired
payback period is 2.51 years or greater.
(2nd Proposal)
CASH OUTFLOWS                                   @     12%               CASH INFLOWS
Cash Flow  PVF =
x              PVB
(0)            Cost of New Asset          \$701,391     (1)           \$259,493  0.893 =
x          \$231,690
Shipping            4,000     (2)            240,057  0.797 =
x           191,372
Working Capital             6,500     (3)            144,941  0.712 =
x           103,166
Sale Proceeds             (8,000)    (4)            108,221  0.636 =
x            68,776
Tax on Sale of Old Asset          (11,375)    (5)            104,000  0.567 =
x            59,012
(6)                   0 0.000 =
x                 0
(7)                   0 0.000 =
x                 0
(8)                   0 0.000 =
x                 0
(9)                   0 0.000 =
x                 0
(10)                   0 0.000 =
x                 0
_________                                         _________
P.V. OF COSTS =            \$692,516         P.V. OF BENEFITS =               \$654,017
SUMMARY OF FINDINGS

Net Present Value =       (\$38,499)                Profitability Index =     0.94
Internal Rate of Return =        9.26%                  Payback Period (yrs) =    3.44
Modified Internal Rate of Return =       10.73%

MODIFIED INTERNAL RATE OF RETURN
CASH OUTFLOWS                                 @  12%                       CASH INFLOWS
Cash Flow x         FVF =       Future Value
(0)            Cost of New Asset          \$701,391       (1)      259,493  x      1.574 =           \$408,317
Shipping           \$4,000       (2)      240,057  x      1.405 =            337,262
Working Capital            \$6,500       (3)      144,941  x      1.254 =            181,814
Sale Proceeds            (\$8,000)      (4)      108,221  x      1.120 =            121,207
Tax on Sale of Old Asset         (\$11,375)      (5)      104,000  x      1.000 =            104,000
(6)             0 x      0.000 =                  0
(7)             0 x      0.000 =                  0
(8)             0 x      0.000 =                  0
(9)             0 x      0.000 =                  0
(10)             0 x      0.000 =                  0
_________                                                  _________
P.V. OF COSTS =            \$692,516           P.V. OF BENEFITS =                   \$1,152,601
SCRATCHSHEET AREA
Year      Equiv. CF   Yrs. of Reinvestment
Modified Internal Rate of Return =          10.73%        0     (\$692,516)
1              0            4
2              0            3
3              0            2
4              0            1
5     1,152,601             0
6              0            0
7              0            0
8              0            0
9              0            0
10              0            0
Proposal A

CASH OUTFLOWS                                  @    12%                         CASH INFLOWS

(0)            Cost of New Asset          \$50,000          (1)         12,157  x      0.893   =       \$10,855
Shipping               0          (2)         12,530  x      0.797   =         9,989
Working Capital                0          (3)         11,542  x      0.712   =         8,215
Sale Proceeds            (8,000)         (4)         11,296  x      0.636   =         7,179
Tax on Sale of Old Asset         (11,375)         (5)              0  x      0.000   =             0
(6)              0  x      0.000   =             0
(7)              0  x      0.000   =             0
(8)              0  x      0.000   =             0
(9)              0  x      0.000   =             0
(10)              0  x      0.000   =             0
(4)          5,612  x      0.636   =         3,567
(8)          5,612  x      0.404   =         2,267
(12)          5,612  x      0.257   =         1,441
(16)          5,612  x      0.163   =           916
P.V. OF COSTS =            \$30,625                P.V. OF BENEFITS =                   \$44,427

Net Present Value =      \$13,802
Proposal A should be accepted

Proposal B

CASH OUTFLOWS                                  @    12%                         CASH INFLOWS

(0)            Cost of New Asset         \$701,391          (1)      \$259,493   x      0.893   =      \$231,690
Shipping           4,000          (2)        240,057  x      0.797   =       191,372
Working Capital            6,500          (3)        144,941  x      0.712   =       103,166
Sale Proceeds            (8,000)         (4)        108,221  x      0.636   =        68,776
Tax on Sale of Old Asset         (11,375)         (5)        104,000  x      0.567   =        59,012
(6)              0  x      0.000   =             0
(7)              0  x      0.000   =             0
(8)              0  x      0.000   =             0
(9)              0  x      0.000   =             0
(10)              0  x      0.000   =             0
(5)        (38,499) x      0.567   =       (21,845)
(10)        (38,499) x      0.322   =       (12,396)
(15)        (38,499) x      0.183   =        (7,034)
0               0  x      0.000   =             0
P.V. OF COSTS =           \$692,516                P.V. OF BENEFITS =                  \$612,742

Net Present Value =      (\$79,773)
Net Present Value Profile
\$4,000

\$3,000

\$2,000

\$1,000
Net Present Value

\$0
0.00%   5.00%   10.00%              15.00%           20.00%   25.00%   30.00%

(\$1,000)

(\$2,000)

(\$3,000)

(\$4,000)
Discount Rate
Cash Flows of the Project

15,000                12,157   12,530   11,542   11,296

10,000

5,000
0         0       0       0        0        0
0

(5,000)

(10,000)

(15,000)

(20,000)

(25,000)

(30,000)
(30,625)

(35,000)
1         2        3        4        5         6        7        8       9       10       11
Year

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