ACC 310F Lecture Notes - Lecture 11: Discounted Cash Flow, Capital Budgeting, Cash Flow

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whitewildebeest151

7 Sep 2018

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We studied how firms evaluate expenditures on long-lived resources using the tools of capital budgeting. These capital budgeting techniques help organizations determine how much and which type of capacity to acquire. Most of these techniques take into account not only the amount of cash flows but also the timing of cash flows. Using a reasonable and realistic estimate of life expectancy is important, as the estimate significantly influences the profitability of the investment. The salvage value is the residual value from selling the asset at the end of its useful life. Operating cash inflows come in the form of revenue increases or cost reductions. Operating cash outflows typically include increases in variable costs and increases in controllable fixed costs. The cost of capital is the opportunity cost of foregone monetary returns. The cost of capital is higher for riskier projects and can be difficult to estimate.

Related Questions

Capital Budgeting
Glacier Creek Textiles is planning to purchase new manufacturing equipment. The equipment has an acquisition cost of $100,000, an estimated useful life of five years and no residual value. The company uses a 12% rate of return to evaluate capital projects. The cash flows for the five years:

Year	Net Cash Outflows	Net Cash Inflows
Year	Amount invested	Net Cash Inflows
0	($100,000)
1		25,000
2		29,000
3		26,000
4		28,000
5		35,000


Requirements
1. Compute the accounting rate of return.
2. Compute the net present value of the investment using Excel's PV function.
3. Compute the net present value of the investment using Excel's NPV function.
4. Compute the profitability index, rounded to two decimal places.
5. Compute the internal rate of return of the investment using Excel's IRR function. Display to two decimal places, but do not round.

Excel Skills
1. Function PV
2. Function NPV
3. Function IRR

	Evaluate Glacier Creek Textiles' new manufacturing equipment.

	Data
	Annual discount Rate	0.12
	Cash Flow Year 0 (Cost)	(100,000)
	Cash Flow Year 1	25,000
	Cash Flow Year 2	29,000
	Cash Flow Year 3	26,000
	Cash Flow Year 4	28,000
	Cash Flow Year 5	35,000
	Useful Life in years	5
	Residual value	0



Requirement 1	Compute the Accounting Rate of Return

	Average annual operating income	Average amount invested	Accounting Rate of Return - ARR
	xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx	xxxxxxxxxxxxxx	xxxxxxxxxxxxxxxxx



Requirement 2	Compute the net present value of the investment using Excel's PV function.

	Period	Cash Flows
	1	(22,321)	Note: The first period is shown as an example.
	2	xxxxxxxx
	3	xxxxxxxx
	4	xxxxxxxx
	5	xxxxxxxx
	Present value of net cash flows	xxxxxxxx	Note: PV calculates the present value as a negative amount.
	Cost of Asset	xxxxxxxx
	Net Present Value	xxxxxxxx



Requirement 3	Compute the net present value of the investment using Excel's NPV function


	Present value of net cash flows	xxxxxxxxxx
	Cost of asset	xxxxxxxxxx
	Net Present Value	xxxxxxxxxx


Requirement 4	Compute the profitability index, rounded to two decimal places.

	Profitability index	xxxxxxxxxx


Requirement 5	Compute the internal rate of return of the investment using Excel's IRR function.
	Display to two decimal places, but do not round.

	IRR	xxxxxxxxx	Note: IRR requires a negative amount for the investment.

Places with xxxxx's are what needs to be filled in, and it's for excel so if I could see the references to which numbers and the formula used that would be helpful. Thank you!!

tanimpala296

Rockyford Company must replace some machinery that has zero book value and a current market value of $1,600. One possibility is to invest in new machinery costing $41,000. This new machinery would produce estimated annual pretax cash operating savings of $16,400. Assume the new machine will have a useful life of four years and depreciation of $10,250 each year for book and tax purposes. It will have no salvage value at the end of four years. The investment in this new machinery would require an additional $2,300 investment of net working capital. (Assume that when the old machine was purchased the incremental net working capital required at the time was $0.)

If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment will occur during the next four calendar years.

Rockyford is subject to a 40% income-tax rate for all ordinary income and capital gains and has a 11% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end. (For Parts 2 and 3, use the relevant table from Appendix CâTable 1 or Table 2.)

Required:

1.	Determine the after-tax cash flow arising from disposing of the old machinery.

2.	Determine the present value of the after-tax cash flows for the next four years attributable to the cash operating savings. (Round your answer to the nearest whole dollar amount.)

3.	Determine the present value of the tax shield effect of depreciation for year 1. (Round your answer to the nearest whole dollar amount.)

Which one of the following is the proper treatment for the additional $2,300 of net working capital required in the current year?

	It should be ignored in capital budgeting because it is not a capital investment.
	It is a sunk cost that needs no consideration in capital budgeting.
	It should be treated as part of the initial investment when determining the net present value.
	It should be spread over the machineryâs four-year life as a cash outflow in each of the years.
	It should be included as part of the cost of the new machine and depreciated. May I please receive a step-by-step walkthough for each problem.

ceruleancamel846

1. Understand how to use EXCEL Spreadsheet
(a) Develop proforma Income Statement Using ExcelSpreadsheet
(b) Compute Net Project Cashflows,NPV, and IRR
(c) Developproblem-solving and critical thinking skills
	and make long-term investment decisions

1) LifePeriod of the Equipment = 4 years			8) Sales for first year (1)			$200,000
2) Newequipment cost		$(200,000)	9) Sales increase per year			5%
3)Equipment ship & install cost		$(35,000)	10) Operating cost (60% of Sales)			$(120,000)
4) Relatedstart up cost		$(5,000)	(as a percent of sales in Year 1)			-60%
5)Inventory increase		$25,000	11) Depreciation (Straight Line)/YR			$(60,000)
6) AccountsPayable increase		$5,000	12) Marginal Corporate Tax Rate (T)			21%
7) Equip.salvage value before tax		$15,000	13) Cost of Capital (Discount Rate)			10%



ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0)

		CF0	CF1	CF2	CF3	CF4
Year		0	1	2	3	4
Investments:
1)Equipment cost
2) Shippingand Install cost
3) Start upexpenses
Total Basis Cost (1+2+3)
4) Net Working Capital
Total Initial Outlay

Operations:
Revenue
OperatingCost
Depreciation
EBIT
Taxes
Net Income

Addback Depreciation

Total Operating Cash Flow			XXXXX	XXXXX	XXXXX	XXXXX

Terminal:
1) Changein net WC			$-	$-	$-	$20,000
2) Salvagevalue (after tax)		Salvage Value Before Tax (1-T)				XXXXX
Total						XXXXX

Project Net Cash Flows		$-	$-	$-	$-	$

NPV =		IRR =			Payback=

Q#1	Would you accept the project based on NPV, IRR?
	Would you accept the project based on Payback rule if projectcut-off
	is 3years?
Q#2 Impact of 2017 Tax Cut Acton Net Income, Cash Flows and
	Capital Budgeting (Investment ) Decisions
(a)	Estimate NPV, IRR and Payback Period of the project if equipment isfully
	depreciated in first year and tax rate equalsto 21%. Would you
	accept or reject the project?
(b)	As a CFO of the firm, which of the above two scenario(a) or (b)
	would you choose? Why?
Q#3 How would you explain to your CEOwhat NPV means?
Q#4 What are advantages anddisadvantages of using only Payback method?
Q#5 What are advantages and disadvantages of usingNPV versus IRR?
Q#6 Explain the difference between independent projectsand mutually exclusive projects.
	When you are confronted with Mutually Exclusive Projects and havecoflicts
	with NPV and IRR results, which criterion would you use (NPV orIRR) and why? *****SHOW WORK PLEASE !!!!

mauvespider741

ACC 310F Lecture Notes - Lecture 11: Discounted Cash Flow, Capital Budgeting, Cash Flow

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