Welcome to your ML301 Capital Budgeting

1. You are given the following information. What is the initial cash outflow?

Purchase and installation of new equipment  - $12,000

Sale price of replaced equipment -  $ 4,000

Book value of replaced equipment  - $ 3,000

When the new equipment is installed:

Inventory increase   -  $ 2,000

Accounts payable increase  -  $ 1,000

Tax rate  -  40%

2. A machine costs $3 million and has zero salvage value. Assume a discount rate of 10% and a 40% tax rate. The machine is depreciated straight-line over 3 years for tax purpose. What is the present value of depreciation tax savings associated with this machine?
3. Alpha Car Rental purchased 5 cars for a total of $100,000 three years ago. Now it is replacing the cars with newer vehicles. The company has depreciated 92.59% of the old cars, and sold these cars for a total of $ 25,000. Assume a tax rate of 40%. What is the cash inflow from the sale of these vehicles?
4. Net working capital decreases when
5. The cash flows associated with an investment project are as follows:

Cash Flows

 

Initial Outflow

-$7,000,000

Year 1

$ 100,000

Year 2

$ 200,000

Year 3

$ 540,000


In year 4 and beyond, cash flows would continue to grow at 4 percent per year. Assume a discount rate of 10%. What is the NPV of this investment?

6. A certain investment will require an immediate cash outflow of $3 million. At the end of each of the next three years, the investment will generate cash inflows of $1.3 million. If the discount rate is 10%, what is the project’s NPV?
Exhibit 9-1

A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of $5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues.


7. Refer to Exhibit 9-1. The tax rate is 40%. What is the net cash flow in year 1?

8. Refer to Exhibit 9-1. Assume the tax rate is 40%, and the cost of capital is 10%. What is the present value of cash inflows from year 1 to year 5? What percentage of this present value is attributed to the tax benefits accruing from depreciation?
9. Refer to Exhibit 9-1. Assume the tax rate is 40%, and the cost of capital is 10%. What is the net present value of the project?
10. Johnson Chemicals is considering an investment project. The project requires an initial $3 million outlay for equipment and machinery. Sales are projected to be $1.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of $100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10%.What is the NPV of this investment?