Submitted by: Submitted by keelan2700
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Category: Business and Industry
Date Submitted: 07/30/2013 07:37 AM
Week 4
Capital Budgeting Problem
George and William Phelps are considering a 6 year project that would require a cash outlay
of $80,000 for equipment and an additional $20,000 for working capital that would be released
at the end of the project. The equipment would be depreciated evenly over the 6 years and
have a salvage value of $8,000 at the end of 6 years. The project would generate before tax
annual cash inflows of $28,500. The tax rate is 35% and the company’s discount rate is 14%.
Cost of new equipment $80,000.00
Increase need for Working Capital $20,000.00
Length of project 6 years
Salvage Value of equipment at end of project $8,000.00
Annual cash savings if equipment is purchased $28,500.00
Tax Rate 35%
Discount Rate 14%
Depreciation Expense=(cost of equipment-salvage value)/life of equipment
($80,000-$8,000)/6
$12,000.00
Required:
1. What is the annual accounting income?
Annual cash savings $28,500.00
Less: annual depreciation $12,000.00
Before tax income $16,500.00
Income taxes (35%) $5,775.00
Annual accounting net income $10,725.00
2. What is the annual after tax cash flow?
Annual accounting net income $10,725.00
Add back non-cash depreciation $12,000.00
Annual after tax net cash inflows $22,725.00
3. What is the payback based upon the initial cash outflow?
Payback period = Cost of initial cash outflows (investment) / annual cash inflows
($80,000+$20,000) / $22,725
4.40 years
4. What is the discounted payback based upon the initial cash outflows?
Annual Cash Inflows 14% PV Factor Discounted Cash Flow Balance of Initial Inv Discounted Payback
Year 0 $100,000.00...