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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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