Capital Budgeting

Part A)

Given Scenario |

Initial investment of $1,000,000 is required to buy equipment that will presumably lead to more capacity. |

Cash operating expenses are $450,000. |

Equipment has a useful life of 10 years and it would be depreciated using straight line metod. At the end of 10th year, the salvage value is expected as $200,000. |

Cost of capital = 10% Initial Investment Outlay | | |

| Cost of new equipment | $ 1,000,000 |

| Investment in net working capital | $ 80,000 |

| | | | $ 1,080,000 |

| | | | |

Terminal year non- operating cashflow | |

| Salvage value | | 200,000 |

|

Part B) The operating cash flows has been summarized below:- | | | | | | |

| | | | | | | | | | |

Estimated Cash Flow | | | | | | | | | |

| Year |

| 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |

| In Dollars |

| | | | | | | | | | |

Sales | 450,000 | 450,000 | 450,000 | 450,000 | 450,000 | 450,000 | 450,000 | 450,000 | 450,000 | 450,000 |

Less | | | | | | | | | | |

Cash operating expenses | 150,000 | 150,000 | 150,000 | 150,000 | 150,000 | 150,000 | 150,000 | 150,000 | 150,000 | 150,000 |

Depreciation | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 |

| | | | | | | | | | |

Profit before tax | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 |

Less | | | | | | | | | | |

Income Tax @ 30% | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 |

| | | | | | | | | | |

Profit after tax | 140,000 | 140,000 | 140,000 | 140,000 | 140,000 | 140,000 | 140,000 | 140,000 | 140,000 | 140,000 |...