暨南大学管理学院财务学管理课件Chapter 8 Cash Flows and Other Topics in Capital Budgeting.ppt

Step 3: Convert back to NPV Assuming infinite replacement, the EAAs are actually perpetuities. Get the PV by dividing the EAA by the required rate of return. NPV 1 = 617/.14 = $4,407 ￥ ￥ Step 3: Convert back to NPV Assuming infinite replacement, the EAAs are actually perpetuities. Get the PV by dividing the EAA by the required rate of return. NPV 1 = 617/.14 = $4,407 NPV 2 = 428/.14 = $3,057 ￥ ￥ ￥ Step 3: Convert back to NPV Assuming infinite replacement, the EAAs are actually perpetuities. Get the PV by dividing the EAA by the required rate of return. NPV 1 = 617/.14 = $4,407 NPV 2 = 428/.14 = $3,057 This doesn’t change the answer, of course; it just converts EAA to an NPV that can be compared. ￥ ￥ ￥ Practice Problems:Cash Flows Other Topics in Capital Budgeting Project Information: Cost of equipment = $400,000. Shipping installation will be $20,000. $25,000 in net working capital required at setup. 3-year project life, 5-year class life. Simplified straight line depreciation. Revenues will increase by $220,000 per year. Defects costs will fall by $10,000 per year. Operating costs will rise by $30,000 per year. Salvage value after year 3 is $200,000. Cost of capital = 12%, marginal tax rate = 34%. Problem 1a Problem 1a Initial Outlay: (400,000) Cost of asset + ( 20,000) Shipping installation (420,000) Depreciable asset + ( 25,000) Investment in NWC ($445,000) Net Initial Outlay 220,000 Increased revenue 10,000 Decreased defects (30,000) Increased operating costs (84,000) Increased depreciation 116,000 EBT (39,440) Taxes (34%) 76,560 EAT 84,000 Depreciation reversal 160,560 = Annual Cash Flow For Years 1 - 3: Problem 1a Terminal Cash Flow: Salvage value +/- Tax effects of capital gain/loss + Recapture of net working capital Terminal Cash Flow Problem 1a Terminal Cash Flow: Salvage value = $200,000. Book value = depreciable asset - total amount depre