Fnce609 Capital Budgeting Problem Set

Wells Printing Company

1 2 3 Assumptions: Tax Rate Discount Rate Depreciation rates 40.00% 11.00% 20.00% 32.00% 19.00% 12.00% 11.00% 6.00%

($000s) 0 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Revenue (sales increase) Expenses Depreciation Before tax profit Taxes @ 40% After-tax profit Add: Depreciation Installed cost of press Proceeds from sale of old Tax on sale of old Cash Flow Net Cash Flow Present Value Interest Factor Present value of CF NPV IRR MIRR Payback -2,200 1,200 -480 -1,480 -1,480 1.0000 -1,480 $958.63 35.02% 20.63% 2.096412 1 $1,600 -800 -440 $360 $144.00 $216.00 440.00 2 $1,600 -800 -704 $96 $38.40 $57.60 704.00

Years 3 $1,600 -800 -418 $382 $152.80 $229.20 418.00

4 $1,600 -800 -264 $536 $214.40 $321.60 264.00

5 $1,600 -800 -242 $558 $223.20 $334.80 242.00

6

-132 -$132 -$52.80 -$79.20 132.00

$656.00 -$824.00 0.9009 591

$761.60 -$62.40 0.8116 618

$647.20 $584.80 0.7312 473

$585.60 $1,170.40 0.6587 386

$576.80 $1,747.20 0.5935 342

$52.80 $1,800.00 0.5346 28

a) b)

The initial investment required is the cost of the new press: $2,200,000 Operating Cash Inflows attributable to new press: Year 0 Year 1 -$1,480.00 $656.00 Payback Period = NPV: IRR: MIRR: 2.096412 $958.63 35.02% 20.63%

Year 2 $761.60

Year 3 $647.20

Year 4 $585.60

Year 5 $576.80

Year 6 $52.80

c) d)

e)

Due to a positive NPV (indicating profitability) and an IRR and MIRR greater than the cost of capital (indicating positive returns), I recommend to accept the new press. Furthermore, the project's payback period of 2.09 indicates the project will be paid back within one year, providing a less-risky investment.

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Assumptions: Tax Rate Discount Rate

40.00% 12.00%

Central Laundry and Cleaners

1 2 3 4 5 6 Beginning Information New Machine Revenues New machine Expenses Depreciation on New Machine Old Machine Revenues Old Machine Expenses Depriciation on Old Machine 0 Years 1 2 3 4 5 $750,000 $750,000 $750,000...