AFM123 Lecture Notes - Lecture 11: Working Capital, Net Present Value, Fixed Cost

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salmonkangaroo235

26 Oct 2015

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM123

Professor

Peter Blake

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Document Summary

Time value of money means must analyze based on pv of cash flows (present value: use tables to get factors to arrive at pv (cash flow x factor = pv) Restate all cash flows to today different tables - for present value of and for present value of an annuity of . Example 1: business deciding whether or not to buy an additional stamping machine (something they use in their manufacturing process) Machine will generate additional margins (sales - variable costs) ,000 / year (of the next 8 years) Machine will last 8 years but will need a major overhaul after 5 years. Should the company buy the machine if the cost of capital is: 12, 5% For margins (12% at 8th period) - use annuity. For overhaul - it"s not an annuity - so use the other table. Example 2: a 55 year old woman is deciding whether or not to open a business.

Related Questions

Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 12% rate of return on its investments. Use the (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value. Cost of old machine $ 114,000 - Cost of overhaul 147,000 - Annual expected revenues generated 91,000 - Annual cash operating costs after overhaul 45,000 - Salvage value of old machine in 5 years $19,000

Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold. Cost of new machine $ 292,000 - Salvage value of old machine now 45,000 - Annual expected revenues generated 102,000 - Annual cash operating costs 28,000 - Salvage value of new machine in 5 years 5,000

1. Determine the Net Present Value of Alternative 1

2. Determine the Net Present Value of Alternative 2

3. Which alternative should managment select?

coffeecheetah689

Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year. Option One -- Acquire a New Finishing Machine The cost of the machine is $1,000,000, and it will have a useful life of 5 years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for 5 years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on its current fully depreciated finishing machine. Option Two -- Outsource the Finishing Work Verla can outsource the work to LM, Inc., at a cost of $200,000 per year for 5 years. If it outsources, Verla will scrap its current fully depreciated finishing machine. Verlaâs effective income tax rate is 40%. The weighted-average cost of capital is 10%. The firmâs net present value of acquiring the new finishing machine is A. $229,710 net cash outflow. B. $267,620 net cash outflow. C. $369,260 net cash outflow. D. $434,424 net cash outflow.

lavendercrab30

Chapter 13: Applying Excel: Excel Worksheet (Part 1 of 2)

Download the Applying Excel form and enter formulas inall cells that contain question marks.

For example, in cell C22 enter the formula "= B10".

Note: The present value factors could be computed using thebuilt-in Excel function PV, but we recommend using the formulas inAppendix 13B.

Verify that your worksheet matches the example in the text.

Check your worksheet by changing the discount rate to 10%. Thenet present value should now be between $56,518 and$56,535âdepending on the precision of the calculations. If you donot get an answer in this range, find the errors in your worksheetand correct them.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables.

Save your completed Applying Excel form to your computerand then upload it here by clicking âBrowse.â Next, click âSave.âYou will use this worksheet to answer the questions in Part2. rev: 11_08_2017_QC_CS-108759

Chapter 13: ApplyingExcel

Data
Example E
Cost of equipment needed	$60,000
Working capital needed	$100,000
Overhaul of equipment in four years	$5,000
Salvage value of the equipment in fiveyears	$10,000
Annual revenues and costs:
Sales revenues	$200,000
Cost of goods sold	$125,000
Out-of-pocket operating costs	$35,000
Discount rate	14%

Enter a formula into each ofthe cells marked with a ? below
Exhibit 13-8
		Years
	Now	1	2	3	4	5
Purchase of equipment	?
Investment in working capital	?
Sales		?	?	?	?	?
Cost of goods sold		?	?	?	?	?
Out-of-pocket operating costs		?	?	?	?	?
Overhaul of equipment					?
Salvage value of the equipment						?
Working capital released						?
Total cash flows (a)	?	?	?	?	?	?
Discount factor (14%) (b)	?	?	?	?	?	?
Present value of cash flows (a) x (b)	?	?	?	?	?	?
Net present value	?

*Use the formulas from Appendix 13B:
Present value of $1 = 1/(1+r)^n
Present value of an annuity of$1 = (1/r)*(1-(1/(1+r)^n))
where n is the number of yearsand r is the discount rate

CAN YOU PLEASE DO ON EXCEL SPREAD SHEET & PUT FORMULAS?

plumeagle764

AFM123 Lecture Notes - Lecture 11: Working Capital, Net Present Value, Fixed Cost

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