FIN 2800 Chapter Notes - Chapter 10-11: Foreign Direct Investment, Current Liability, Sunk Costs

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erindog119

9 Nov 2016

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Capital budgeting: the process of evaluating and selecting long-term investments that are consistent with the firm"s goal of maximizing owners" wealth long-term investments most common is in fixed assets (earning assets) Ex: advertising campaign with expected benefits over a long period; not fixed asset) Ex: new machine with a usable life of 15 years; fixed asset on firm"s balance sheet. Operating expenditure: an outlay of funds by the firm resulting in benefits received within 1 year. Capital budgeting process: five distinct but interrelated steps: proposal generation: proposals for new investment projects, review and analysis, decision making, implementation: expenditures are made and projects implemented, follow-up: actual costs compared with expected. Independent projects: projects whose cash flows are unrelated to one another. Mutually exclusive projects: projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function.

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DDK Industries is considering a new capital budgeting project that will last for three years. The initial investment outlay for project equipment is expected to be $110,000. The equipment will be straight-line depreciated down to zero book value over the three year period. The expected market value of the project assets is forecasted to be $50,000 when the project is liquidated at the end of the third year. Project will require $7,000 Net Working Capital investments in years 1 and 2. The project does not require any investment in fixed assets during years 1 and 3, but a $10,000 investment is projected in year 2. DDKâs cost of capital is 12% and the project does not have a distinct risk profile. DDKâs tax rate is 35%. Based on extensive research, analysts have prepared the following incremental revenues and before tax costs:

Year	0	1	2	3
Sales (Revenues)		100,000	100,000	100,000
- Cost of Goods Sold (50% of Sales)		50,000	50,000	50,000
Depreciation		36,667	36.667	36,667
EBIT		13,333	13,333	13,333
Capital Expenditures	-110,000	0	-10,000	0

Note: Additional fixed capital investments are depreciated straight line over a three-year period; the first depreciation expense is deducted at the end of the year following the investment. The 50,000 liquidation value reflects enhancements realized through capital investments in fixed assets.

The after tax project cash flow including the terminal cash flow for the project in year 3 is closest to ___________?

goldfrog557

DDK Industries is considering a new capital budgeting project that will last for three years. The initial investment outlay for project equipment is expected to be $110,000. The equipment will be straight-line depreciated down to zero book value over the three-year period. The expected market value of the project assets is forecasted to be $50,000 when the project is liquidated at the end of the third year. The project will require $7,000 Net Working Capital investments in years 1 and 2. The project does not require any investment in fixed assets during years 1 and 3, but a $10,000 investment is projected in year 2. DDKâs cost of capital is 12% and the project does not have a distinct risk profile. DDKâs tax rate is 35%. Based on extensive research, analysts have prepared the following incremental revenues and before tax costs:

Year	0	1	2	3
Sales (Revenues)		100,000	100,000	100,000
- Cost of Goods Sold (50% of Sales)		50,000	50,000	50,000
Depreciation		36,667	36.667	36,667
EBIT		13,333	13,333	13,333
Capital Expenditures	-110,000	0	-10,000	0

The NPV and IRR of the DKK Project is closest to _________ (round up your solution to the nearest integer for NPV)

A)	$14,670, 18.415

B) $4,866; 14.10%

C) $12,179, 17.38%

D) $7,712; 15.35%

E) none of the numerical choices shown is correct

scarletgrasshopper334

XXX Industries is considering a new capital budgeting project that will last for three years. The initial investment outlay for project equipment is expected to be $110,000. The equipment will be straight-line depreciated down to zero book value over the three year period. The expected market value of the project assets is forecasted to be $50,000 when the project is liquidated at the end of the third year. Project will require $7,000 Net Working Capital investments in years 1 and 2. The project does not require any investment in fixed assets during years 1 and 3, but a $10,000 investment is projected in year 2. XXXâs cost of capital is 12% and the project does not have a distinct risk profile. XXXâs tax rate is 35%. Based on extensive research, analysts have prepared the following incremental revenues and before tax costs:

Year	0	1	2	3
Sales (Revenues)		100,000	100,000	100,000
- Cost of Goods Sold (50% of Sales)		50,000	50,000	50,000
Depreciation		36,667	36.667	36,667
EBIT		13,333	13,333	13,333
Capital Expenditures	-110,000	0	-10,000	0

1. The after tax project cash flow including the terminal cash flow for the project in year 3 is closest to ___________?

2. The NPV and IRR of the DKK Project is closest to _________ (round up your solution to the nearest integer for NPV)

none of the numerical choices shown is correct

cerisefox116

FIN 2800 Chapter Notes - Chapter 10-11: Foreign Direct Investment, Current Liability, Sunk Costs

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