Submitted by: Submitted by LEOMASUCOL
Views: 10
Words: 2322
Pages: 10
Category: Business and Industry
Date Submitted: 07/29/2015 06:21 PM
Project 1
Assumptions
Sales 1,800,000
COGS(% on Sales) 60%
Capital Investment Cost 200,000
Sales increase by 8%
Savings on COGS 11%
Estimated Economic Life (Years) 5
Cost of Capital 15%
Tax 30%
A. Compute for payback period
Cost of Machine 200,000
Increase in Sales by 8% 144,000 (1,800,000 x 8%)
Decrease in COGS by 11% 118,800 (1,800,000x60% x 11%)
Tax Savings from Depreciation Tax Shield 12,000 (200,000/5*30%)
Cash inflow per year 274,800
Payback period Net cost of Initial Investment
Annual Net Cash Inflows
= 200,000
274,800
= 0.73 year
Decision rule : the shorter the payback period compare to company's standard the lesser the risk of the project
B. Compute for the NPV
Increase in Sales by 8% 144,000 (1,800,000 x 8%)
Decrease in COGS by 11% 118,800 (1,800,000x60% x 11%)
Tax Savings from Depreciation Tax Shield 12,000 (200,000/5*30%)
Cash inflow per year 274,800
YEAR Cash Inflows PVF PV of Cash Inflows
1 274,800 0.869565217 238,956.52
2 274,800 0.756143667 207,788.28
3 274,800 0.657516232 180,685.46
4 274,800 0.571753246 157,117.79
5 274,800 0.497176735 136,624.17
Total PV of Cash Inflows 921,172.22
Less: Cost of Investment 200,000.00
Net Present Value 721,172.22
Decision rule: Accept the project if NPV > 0
C Compute for the IRR
Increase in Sales by 8% 144,000 (1,800,000 x 8%)
Decrease in COGS by 11% 118,800 (1,800,000x60% x 11%)
Tax Savings from Depreciation Tax Shield 12,000 (200,000/5*30%)
Cash inflow per year 274,800
YEAR Cash Inflows PVF @ 135.50% PV of Cash Inflows
0 (200,000)
1 274,800 0.4246 116,686.27
2 274,800 0.1803 49,547.62
3 274,800 0.0766 21,039.03
4 274,800 0.0325 8,933.65...