Question Details
Answered: - Good day, I need help in this 4 questions. I have done this in
Good day,
I need help in this 4 questions.
I have done this in excel and will hope for any detailed correction by expert in this field.
Thank you.
Best Regards,
Kid
1
Use the equivalent annual costs method(EAC)
EAC=Present value of costs/annuity
Discounting rate
The fisrt step in EAC is calculation of NPV then calsulation of EAC
Present value=(1+i)^-n
15%
Replacement in year 1
Time
Initial costs
Maintenace costs
Salvage value
Net cash flows
15% discount factor
Present value
Net present value
0
0
0
1
0
($869.57)
Replacement in year 2
Time
Initial cost
Maintenance cost
Salvage value
Net cash flows
15% discount rate
Present value
Net present value
0
0
1
($3,500)
$2,500
($1,000)
0.8695652174
($869.57)
1
2
($3,500)
0
1
0
($4,933.84)
0
0
2
3
($4,500)
0
1
0
($9,076.19)
($3,500)
0.8695652174
($3,043.48)
($4,500)
0.7561436673
($3,402.65)
($5,500)
$1,500
($4,000)
0.6575162324
($2,630.06)
0
0
1
2
3
4
($3,500)
($4,500)
($5,500)
0
1
0
($13,207.11)
Replacement in year 4
Time
Initial cost
Maintenance cost
Salvage value
Net cash flows
15% discount rate
Present values
Net present value
1
($3,500)
Replacement in year 3
Time
Initial cost
Maintenance cost
Salvage value
Net cash flows
15% discount rate
Present value
Net present value
($3,500)
0.8695652174
($3,043.48)
($4,500)
$2,000
($2,500)
0.7561436673
($1,890.36)
($3,500)
0.8695652174
($3,043.48)
($4,500)
0.7561436673
($3,402.65)
($5,500)
0.6575162324
($3,616.34)
($6,500)
$1,000
($5,500)
0.5717532456
($3,144.64)
Replacement in year 5
Time
Initial cost
Salvage value
Net cash flows
15% discount rate
Present value
Net present value
0
1
($3,500)
2
($4,500)
3
($5,500)
4
($6,500)
0
1
0
($17,507.69)
($3,500)
0.8695652174
($3,043.48)
($4,500)
0.7561436673
($3,402.65)
($5,500)
0.6575162324
($3,616.34)
($6,500)
0.5717532456
($3,716.40)
Year
NPV
15% discounting rate
EAC
1
($869.57)
0.8696
($1,000.00)
2
($4,933.84)
1.6257088847
($3,034.88)
3
($9,076.19)
2.2832251171
($3,975.16)
4
($13,207.11)
2.8549783627
($4,625.99)
5
($17,507.69)
3.352155098
($5,222.81)
2
a.
Cost of capital use CAPM
Required return=Risk free rate-Beta(Market premium)
Risk free rate
Beta
Market premium
Cost of capital
5.50%
0.96
7%
12.22%
b.
Initial investment
Equipment and set up costs
Add:Working capital investment
Depreciation expense
Special pizza equipment
Useful years
Depreciation
$4,000,000
$1,000,000
$5,000,000
2,400,000
8
300000
Pizzas per day
Number of days
Yearly demand
1500
365
547500
5
($7,500)
0
($7,500)
0.4971767353
($3,728.83)
Operating cash flows
Year
Units
Cost per unit
Sales
Less:Wages
Variable costs
Rent expense
Depreciation expense
EBIT
Income taxes
NOPAT
Add back depreciation
Operating cash flows (OCF)
NWC
Initial Investment
FCF
NPV
12.22% discount rate
Present value
Net present value
0
-$1,000,000.00
-$4,000,000.00
-$5,000,000.00
$1,494,954.19
1
547,500
$7
$3,832,500
($300,000)
($1,916,250)
-150,000
-300000
$1,166,250
($198,262.50)
$967,988
$300,000
$1,267,987.500
2
3
4
547,500
547,500
547,500
$7
$7
$7
$3,832,500
$3,832,500
$3,832,500
-312000
-324480
-337459.2
($1,916,250)
($1,916,250)
($1,916,250)
-150,000
-150,000
-150,000
-300000
-300000
-300000
$1,154,250
$1,141,770
$1,128,791
($196,222.50)
($194,100.90)
($191,894.44)
$958,028
$947,669
$936,896
$300,000
$300,000
$300,000
$1,258,027.500 $1,247,669.100 $1,236,896.364
$1,267,987.50
$1,258,027.50
$1,247,669.10
$1,236,896.36
0.8911067546
$1,129,912.23
0.7940712481
$998,963.47
0.7076022528
$882,853.47
0.630549147
$779,923.95
$1,097,361.07
c
i
The replacement decisiosn for machines with different useful life is evaluated using the equivalent annual cost method. Under this method, the NPV of each machine is calculated for its operational years and discounti
II
If investments are interrelated there is a need to develop all the possible combinations of the investments.The combinations should be mutually exclusive. After the combinations grouping, the NPV for each of the com
III
In capital budgeting, only the company overheads applicable to the project should be considered in the calculation of project cash flows. For ,
example, the costs incurred in getting the materials for the projects and not the overall costs of the organization.
Iv
The information on creditors is usually recorded on the changes in working capital. When creditors increase,the working capital increases.When
creditors decrease, the net working capital decreases. Changes in working capital are cosidered part of initial investment in a project.
a
Initial outlay
Investment
Working capital year 1
Working capital year 2
3
$2,000,000
$200,000
$100,000
$2,300,000
Tax rate
Cost of capital
Revenue increases by 1 million upto year 3
Project salvage value
Cost of goods sold
Other operating expenses
17%
12%
$300,000
75% of sales revenue
7% of sales in fisrt year and 5% other years
Operating cash flows
Years
Sales revenue
Cost of goods sold
Gross profit
Other operating costs
Less depreciation
EBIT
Less taxes
EAT
Add depreciation
Net income
Working capital recovered
Salvage value
Operating cash flows
12% discounting rate
Present value
1
$1,000,000
($750,000)
$250,000
($70,000)
($400,000)
($220,000)
($37,400)
($257,400)
$400,000
$142,600
2
$2,000,000
($1,500,000)
$500,000
($100,000)
($400,000)
$0
$0
$0
$400,000
$400,000
3
$3,000,000
($2,250,000)
$750,000
($150,000)
($400,000)
$200,000
($34,000)
$166,000
$400,000
$566,000
4
$3,000,000
($2,250,000)
$750,000
($150,000)
($400,000)
$200,000
($34,000)
$166,000
$400,000
$566,000
$142,600
0.8928571429
$127,321.43
$400,000
0.7971938776
$318,877.55
$566,000
0.7117802478
$402,867.62
$566,000
0.6355180784
$359,703.23
5
$3,000,000
($2,250,000)
$750,000
($150,000)
($400,000)
$200,000
($34,000)
$166,000
$400,000
$566,000
$300,000
$300,000
$1,166,000
0.5674268557
$661,619.71
NPV
($429,610.45)
1
2
3
4
($6,000)
($6,000)
($6,000)
($6,000)
0.8928571429
($5,357.14)
($6,000)
0.7971938776
($4,783.16)
($6,000)
0.7117802478
($4,270.68)
($6,000)
$300,000
$294,000
0.6355180784
$186,842.32
b
Equipment from company A
Year
Initial cost
Operating costs
Salvage value
Net cash flows
12% dicount rate
Present value
0
($34,000)
($34,000)
1
($34,000)
NPV
EAC=NPV/Annuity
Annuity
EAC
Equipment from company
Year
Initial cost
Operating costs
Salvage value
Net cash flows
12% dicount rate
Present value
NPV
Annuity
EAC
$138,431.33
3.0373493466
$45,576.36
0
($24,000)
$170,319.42
2.4018312682
$70,912.32
The company should choose equipment from company A as it has the lowest EAC
4
a
Cost of equity(ke)
Cost of debt before tax
Tax rate
After tax cost of debt(kd)
WACC=Weight of equity*ke+weight of debt*kd
WACC
b
i
Without floatation costs
Initial investment
Present value of a perpetual income=PMT/R
WACC
Operating cashflows
Present value
NPV
II
With floatation costs
WACC
Operating cash flows
Present value
NPV
Cradle print Ltd will accept the new plant project as under both approaches, the NPV is the same and is positive.
20%
10%
17%
8%
14.15%
$500,000
14.15%
$73,500
$519,434.63
$19,434.63
14.15%
$73,500
$519,434.63
$19,434.63
2
3
($8,000)
($24,000)
1
($24,000)
1
($8,000)
($8,000)
0.8928571429
($7,142.86)
($8,000)
0.7971938776
($6,377.55)
($8,000)
$300,000
$292,000
0.7117802478
$207,839.83
Reate of incraese in wage rate
Tax rate
4%
17%
5
6
7
8
547,500
547,500
547,500
547,500
$7
$7
$7
$7
$3,832,500
$3,832,500
$3,832,500
$3,832,500
-350957.568 -364995.87072 -379595.7055488 -394779.533770752
($1,916,250)
($1,916,250)
($1,916,250)
($1,916,250)
-150,000
-150,000
-150,000
-150,000
-300000
-300000
-300000
-300000
$1,115,292
$1,101,254
$1,086,654
$1,071,470
($189,599.71)
($187,213.20)
($184,731.23)
($182,149.98)
$925,693
$914,041
$901,923
$889,320
$300,000
$300,000
$300,000
$300,000
$1,225,692.719 $1,214,040.927 $1,201,923.064
$1,189,320.487
$1,000,000.000
$1,225,692.72
$1,214,040.93
$1,201,923.06
$2,189,320.49
0.561886604
$688,700.32
0.5007009481
$607,871.44
0.4461779969
$536,271.63
0.3975922268
$472,864.58
ounting using the annuity with appropriate discount rate. The machine with the lowest EAC is the best choice.
combinations is calculated. The combination with the highest NPV is chosen.
,
Depreciation of investment plant
$400,000
1
Use the equivalent annual costs method(EAC)
EAC=Present value of costs/annuity
Discounting
11%
Time(1 year replacement)
Time
0
1 Discounting
Present value
Initial cost
0
Maintenance
($3,500)
1
($3,500)
Salvage value
$2,500 0.900901 $2,252.25
Net present value
($1,248)
Time(2 year replacement)
Time
0
1
Initial cost
Maintenance
($3,500)
Salvage value
2
($4,500)
$2,000
1
Use the equivalent annual costs method(EAC)
EAC=Present value of costs/annuity
Discounting
11%
Present value of lumpsum due due=(1+i)^-n *(1+i)
Present value of lumpsum=(1+i)^-n
The maintenace costs for the existing machine is an ordinary annuty due and the salvage value is an ordinary annuity
Replacement in the 1 year
Time
0
1
Initial costs
0
Mantenance costs
($3,500)
Salvage value
$2,500
NPV
($1,247.75)
Replacement in year 2
Time
0
Initial costs
0
Maintenance costs
Salvage value
NPV
-8629.00739
1
2
($3,500)
($4,500)
$2,000
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DATE ANSWEREDOct 07, 2020
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