Answered: - Good day, I need help in this 4 questions. I have done this in

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

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

($869.57)

Replacement in year 2

Time

Initial cost

Maintenance cost

Salvage value

Net cash flows

15% discount rate

Present value

Net present value

($3,500)

$2,500

($1,000)

0.8695652174

($869.57)

($3,500)

($4,933.84)

($4,500)

($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)

($3,500)

($4,500)

($5,500)

($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

($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

($3,500)

($4,500)

($5,500)

($6,500)

($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

($869.57)

0.8696

($1,000.00)

($4,933.84)

1.6257088847

($3,034.88)

($9,076.19)

2.2832251171

($3,975.16)

($13,207.11)

2.8549783627

($4,625.99)

($17,507.69)

3.352155098

($5,222.81)

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

12.22%

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

300000

Pizzas per day

Number of days

Yearly demand

1500

365

547500

($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

-$1,000,000.00

-$4,000,000.00

-$5,000,000.00

$1,494,954.19

547,500

$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

547,500

$3,832,500

-312000

-324480

-337459.2

($1,916,250)

-150,000

-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

$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

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

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.

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.

Initial outlay

Investment

Working capital year 1

Working capital year 2

$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

$1,000,000

($750,000)

$250,000

($70,000)

($400,000)

($220,000)

($37,400)

($257,400)

$400,000

$142,600

$2,000,000

($1,500,000)

$500,000

($100,000)

($400,000)

$400,000

$3,000,000

($2,250,000)

$750,000

($150,000)

($400,000)

$200,000

($34,000)

$166,000

$400,000

$566,000

$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

$3,000,000

($2,250,000)

$750,000

($150,000)

($400,000)

$200,000

($34,000)

$166,000

$400,000

$566,000

$300,000

$1,166,000

0.5674268557

$661,619.71

NPV

($429,610.45)

($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

Equipment from company A

Year

Initial cost

Operating costs

Salvage value

Net cash flows

12% dicount rate

Present value

($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

($24,000)

$170,319.42

2.4018312682

$70,912.32

The company should choose equipment from company A as it has the lowest EAC

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

Without floatation costs

Initial investment

Present value of a perpetual income=PMT/R

WACC

Operating cashflows

Present value

NPV

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%

14.15%

$500,000

14.15%

$73,500

$519,434.63

$19,434.63

14.15%

$73,500

$519,434.63

$19,434.63

($8,000)

($24,000)

($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

17%

547,500

$3,832,500

-350957.568 -364995.87072 -379595.7055488 -394779.533770752

($1,916,250)

-150,000

-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

$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

Use the equivalent annual costs method(EAC)

EAC=Present value of costs/annuity

Discounting

11%

Time(1 year replacement)

Time

1 Discounting

Present value

Initial cost

Maintenance

($3,500)

Salvage value

$2,500 0.900901 $2,252.25

Net present value

($1,248)

Time(2 year replacement)

Time

Initial cost

Maintenance

($3,500)

Salvage value

($4,500)

$2,000

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

Initial costs

Mantenance costs

($3,500)

Salvage value

$2,500

NPV

($1,247.75)

Replacement in year 2

Time

Initial costs

Maintenance costs

Salvage value

NPV

-8629.00739

($3,500)

($4,500)

$2,000

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