FIN 300 Chapter 3: Chapter 3
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Carlisle company is in need of new production line equipment that will increase the throughput and allow them to meet anticipated demand for the next 10 years. This equipment is the H5500 Robotics platform which has proven to be highly reliable when installed at the companyâs other divisions. The shipping costs, sales tax, installation cost for the H5500 will be $120,000. The equipment itself will cost $380,000. The operating and maintenance costs for the equipment is anticipated to be $30,000 per year escalating at the rate of inflation of 3% per year. The companyâs tax rate is 30%. If the annual receipts are as shown in the table below and using a straight line depreciation what is the companyâs anticipated before and after tax profit per year. Note, the salvage value of the equipment is expected to be $50000 at the end of the 10th year.
EOY | Annual Receipts |
0 | 0 |
1 | $200,000.00 |
2 | $250,000.00 |
3 | $300,000.00 |
4 | $300,000.00 |
5 | $300,000.00 |
6 | $350,000.00 |
7 | $400,000.00 |
8 | $350,000.00 |
9 | $200,000.00 |
10 | $150,000.00 |
If the companyâs MARR is 15%
Is this a viable project?
Total Receipts & Disbursements Before Taxes
EOY | Investments | Annual Receipts | Annual O&M |
0 | -$500,000.00 | $0.00 | |
1 | $200,000.00 | -$30,000.00 | |
2 | $250,000.00 | -$30,900.00 | |
3 | $300,000.00 | -$31,827.00 | |
4 | $300,000.00 | -$32,781.81 | |
5 | $300,000.00 | -$33,765.26 | |
6 | $350,000.00 | -$34,778.22 | |
7 | $400,000.00 | -$35,821.57 | |
8 | $350,000.00 | -$36,896.22 | |
9 | $200,000.00 | -$38,003.10 | |
10 | $50,000.00 | $150,000.00 | -$39,143.20 |
Have I identified all my cash flows now to determine my net cash flow (NCF)?
Total Receipts & Disbursements Before Taxes w/Depreciation
The depreciable amount is: $500,000 - $50,000 = $450,000
Useful Life is 10 Years
Depreciation per year: $450,000/10 = $45,000
EOY | Investments | Annual Receipts | Annual O&M | Annual Depreciation |
0 | -$500,000.00 | $0.00 | $0.00 | $0.00 |
1 | $200,000.00 | -$30,000.00 | -$45,000.00 | |
2 | $250,000.00 | -$30,900.00 | -$45,000.00 | |
3 | $300,000.00 | -$31,827.00 | -$45,000.00 | |
4 | $300,000.00 | -$32,781.81 | -$45,000.00 | |
5 | $300,000.00 | -$33,765.26 | -$45,000.00 | |
6 | $350,000.00 | -$34,778.22 | -$45,000.00 | |
7 | $400,000.00 | -$35,821.57 | -$45,000.00 | |
8 | $350,000.00 | -$36,896.22 | -$45,000.00 | |
9 | $200,000.00 | -$38,003.10 | -$45,000.00 | |
10 | $50,000.00 | $150,000.00 | -$39,143.20 | -$45,000.00 |
Total Receipts & Disbursements Before Taxes Net Cash Flow (NCF)
EOY | Investments | Annual Receipts | Annual O&M | Annual Depreciation | Before Tax NCF |
0 | -$500,000.00 | $0.00 | $0.00 | $0.00 | -$500,000.00 |
1 | $200,000.00 | -$30,000.00 | -$45,000.00 | $125,000.00 | |
2 | $250,000.00 | -$30,900.00 | -$45,000.00 | $174,100.00 | |
3 | $300,000.00 | -$31,827.00 | -$45,000.00 | $223,173.00 | |
4 | $300,000.00 | -$32,781.81 | -$45,000.00 | $222,218.19 | |
5 | $300,000.00 | -$33,765.26 | -$45,000.00 | $221,234.74 | |
6 | $350,000.00 | -$34,778.22 | -$45,000.00 | $270,221.78 | |
7 | $400,000.00 | -$35,821.57 | -$45,000.00 | $319,178.43 | |
8 | $350,000.00 | -$36,896.22 | -$45,000.00 | $268,103.78 | |
9 | $200,000.00 | -$38,003.10 | -$45,000.00 | $116,996.90 | |
10 | $50,000.00 | $150,000.00 | -$39,143.20 | -$45,000.00 | $115,856.80 |
EOY | Investments | Annual Receipts | Annual O&M | Annual Depreciation | Before Tax NCF | Taxes | After Tax NCF |
0 | -$500,000.00 | $0.00 | $0.00 | $0.00 | -$500,000.00 | $0.00 | -$500,000.00 |
1 | $200,000.00 | -$30,000.00 | -$45,000.00 | $125,000.00 | -$37,500.00 | $87,500.00 | |
2 | $250,000.00 | -$30,900.00 | -$45,000.00 | $174,100.00 | -$52,230.00 | $121,870.00 | |
3 | $300,000.00 | -$31,827.00 | -$45,000.00 | $223,173.00 | -$66,951.90 | $156,221.10 | |
4 | $300,000.00 | -$32,781.81 | -$45,000.00 | $222,218.19 | -$66,665.46 | $155,552.73 | |
5 | $300,000.00 | -$33,765.26 | -$45,000.00 | $221,234.74 | -$66,370.42 | $154,864.31 | |
6 | $350,000.00 | -$34,778.22 | -$45,000.00 | $270,221.78 | -$81,066.53 | $189,155.24 | |
7 | $400,000.00 | -$35,821.57 | -$45,000.00 | $319,178.43 | -$95,753.53 | $223,424.90 | |
8 | $350,000.00 | -$36,896.22 | -$45,000.00 | $268,103.78 | -$80,431.14 | $187,672.65 | |
9 | $200,000.00 | -$38,003.10 | -$45,000.00 | $116,996.90 | -$35,099.07 | $81,897.83 | |
10 | $50,000.00 | $150,000.00 | -$39,143.20 | -$45,000.00 | $115,856.80 | -$34,757.04 | $81,099.76 |
Given the Before Tax NCF is in column I - Using Excel: IRR = IRR(I2:I12) = 36%
Given the After Tax NCF is in column k â Using Excel: IRR = IRR(k2:k12) = 24%
Given MARR = 15%, this is an acceptable project since the companyâs after tax IRR is 24%
Repeat the above analysis using a SOYD Depreciation and the following additional information
The Carlisle company in addition to the previous information supplied has applied for and received a tax credit of $15,000 for year 1. It is expected to be the same for each of the remaining 9 years. Note: you will need to research as to what is a tax credit and how is it used.
If the Carlisle Company used a SOYD Depreciation what is the
Before Tax Net Cash Flow?
After Tax Net Cash Flow?
After Tax Rate of Return?
Discuss these results and compare to the previous analysis:
What is different?
Which is better for the company to use, Straight Line or SOYD depreciation?
In your conclusions discuss the ramification on the IRR that depreciation and tax credits have.
The shipping costs, sales tax, installation cost for the RBT500will be $120,000. The equipment itself will cost $380,000. Theoperating and maintenance costs for the equipment is anticipated tobe $30,000 per year escalating at the rate of inflation of 3% peryear.
The companyâs tax rate is 30%. If the annual receipts are asshown in the table below and using a straight line depreciationwhat is the companyâs anticipated before and after tax profit peryear. Note, the salvage value of the equipment is expected to be$50,000 at the end of the 10thyear.
Before Tax Net Cash Flow?
After Tax Net Cash Flow?
After Tax Rate of Return?
Discuss these results and compare to the previous analysis:
What is different?
Which is better for the company to use, Straight Line or SOYDdepreciation?
What ramifications do depreciation and tax credits have on theIRR?
new equipment for its Maintenance Overhaul and Repair (MRO)station that will increase the throughput and allow them to meetanticipated demand for the next 10 years. This equipment is theRBT500 Robotics platform which has proven to be highly reliablewhen installed at the companyâs other divisions.
EOY | Investments | Annual Receips | Annual O&M | Annual Depreciation | Before Tax NCF | Taxes | After Tax NCF |
0 | ($500,000) | $0 | $0 | $0 | ($500,000) | $0 | ($500,000) |
1 | $200,000 | ($30,000) | ($45,000) | $125,000 | ($37,500) | $87,500 | |
2 | $250,000 | ($30,900) | ($45,000) | $174,100 | ($52,230) | $121,870 | |
3 | $300,000 | ($31,827) | ($45,000) | $223,173 | ($66,952) | $156,221 | |
4 | $300,000 | ($32,782) | ($45,000) | $222,218 | ($66,665) | $155,553 | |
5 | $300,000 | ($33,765) | ($45,000) | $221,235 | ($66,370) | $154,864 | |
6 | $350,000 | ($34,778) | ($45,000) | $270,222 | ($81,067) | $189,155 | |
7 | $400,000 | ($35,822) | ($45,000) | $319,178 | ($95,754) | $223,425 | |
8 | $350,000 | ($36,896) | ($45,000) | $268,104 | ($80,431) | $187,673 | |
9 | $200,000 | ($38,003) | ($45,000) | $116,997 | ($35,099) | $81,898 | |
10 | $50,000 | $150,000 | ($39,143) | ($45,000) | $115,857 | ($34,757) | $81,100 |
EOY | Annual Receipts |
0 | 0 |
1 | $200,000.00 |
2 | $250,000.00 |
3 | $300,000.00 |
4 | $300,000.00 |
5 | $300,000.00 |
6 | $350,000.00 |
7 | $400,000.00 |
8 | $350,000.00 |
9 | $200,000.00 |
10 | $150,000.00 |
If the companyâs MARR is 15%
Capital Budgeting Group Presentation Project
Instructions: This project requires you to apply the concepts and methods learned in the course. This is a group project.
Assignment: You are interested in proposing a new venture (Project I) to the management of your company. Pertinent financial information is given below.
Balance Sheet Data
Cash | 3,000,000 | Accounts Payable and Accruals | 14,000,000 |
Accounts Receivable | 24,000,000 | Notes Payable | 41,000,000 |
Inventories | 45,000,000 | Long-Term Debt | 50,000,000 |
Preferred Stock | 20,000,000 | ||
Net Fixed Assets | 128,000,000 | Common Equity | 75,000,000 |
Total Assets | 200,000,000 | Total Liabilities & Ownersâ Equity | 200,000,000 |
Last yearâs sales were $210,000,000.
The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 9 percent semi-annual coupon, and are currently selling for $870.73.
You also have 100,000 shares of perpetual preferred stock outstanding, which pays a dividend of $7.80 per share. The current market price is $94.00.
The company has 10 million shares of common stock outstanding with a current price of $15.00 per share. The stock exhibits a constant growth rate of 8 percent. The last dividend (D0) was $.90.
Your firm does not use notes payable for long-term financing.
The firmâs target capital structure is 25% debt, 5% preferred stock, and 70% common equity. The firm does not plan to issue new common stock.
Your firmâs federal + state marginal tax rate is 38%.
The firm has the following investment opportunities currently available in addition to the venture that you are proposing:
Project | Cost | IRR |
A | 17,000,000 | 21% |
B | 21,000,000 | 19% |
C | 16,000,000 | 15% |
D | 28,000,000 | 11% |
E | 25,000,000 | 8% |
All projects, including Project I, are assumed to be of average risk. Your venture would consist of a new product introduction (You should label your venture as Project I, for âintroductionâ). You estimate that your product will have a six-year life span, and the equipment used to manufacture the project falls into the MACRS 5-year class. The resulting MACRS depreciation percentages for years 1 through 6, respectively, are 20%, 32%, 19%, 12%, 11%, and 6%. Your venture would require a capital investment of $17,000,000 in equipment, plus $1,000,000 in installation costs. The venture would also result in an increase in accounts receivable and inventories of $1,000,000 (value at the end of year 6). At the end of the six-year life span of the venture, you estimate that the equipment could be sold at a $5,000,000 salvage value. Your venture would incur fixed costs of $1,000,000 per year, while the variable costs of the venture would equal 30 percent of revenues. You are projecting that revenues generated by the project would equal $6,000,000 in year 1, $14,000,000 in year 2, $15,000,000 in year 3, $16,000,000 in year 4, $11,000,000 in year 5, and $8,000,000 in year 6.
The following list of steps provides a structure that you should use in analyzing your new venture. Note: Carry all final calculations to two decimal places.
1. Find the costs of the individual capital components (15 points):
a. long-term debt
b. preferred stock
c. retained earnings (use DCF approach)
2. Determine the weighted average cost of capital. (5 points)
3. Compute the Year 0 investment for Project I. (5 points)
4. Compute the annual operating cash flows for years 1-6 of the project. (20 points)
5. Compute the non-operating (terminal) cash flow at the end of year 6. (10 points)
6. Draw a timeline that summarizes all of the cash flows for your venture. (5 points)
7. Compute the IRR, payback, discounted payback, and NPV for Project I. (20 points)
8. Prepare a report for the firmâs CEO indicating which projects should be accepted and why. (45 points)
9. Conclude the project with your reflections on what you have learned from this course and how it has affected your view of your own job and career. (45 points)
10. A 15-20 minute presentation will report out on items 1-9. (65 pts.)
Please Note: Complete the capital budgeting group project according to the instructions contained in the syllabus, and upload all documentation and calculations into this assignment folder. There will be only one submission per group, and submitter will be chosen by the group. Please let the instructor know who will be submitting the group project to Moodle.