# Capital Budgeting-Asset Replacement Assignment (Math Problem Sample)

The Conch Republic Electronics mini-case will allow you to apply the cash flow models for evaluating capital decisions. You are in the role of a recent MBA graduate and have the ability to apply what you learn this week to a “real life” simulation.

Upon Completion of this mini-case, you will demonstrate your ability to:

•Apply the calculations for payback analysis of a capital project.

•Apply the calculations for profitability analysis of a capital project.

•Apply the calculations for a NPV analysis of a capital project.

•Apply the calculations for a IRR analysis of a capital project.

•Make an appropriate recommendation based on the facts presented

Case Study:

After you have completed the readings for chapter 10, you should be ready to complete this assignment. Return to the case study on p.341-342 of the text and reread it carefully. As you are thinking about your response, please remember that one thing about cases – usually the quick answer is not the correct one. You need to be able to decide what the issues at hand are and what information is really critical to giving the correct advice.

Use the questions at the end of the case for guidance, but remember you may add to your explanations. One thing that student’s tend to do with a case is bring in more information than what is needed – stick to the facts as presented in the case and the chapter readings.

Please prepare and submit a 1-3 page response including synthesis of chapter readings and applications to corporate organizational structure.

To receive full credit, for Mini-cases:

You are to answer the questions that are found at the end of each case in your textbook as clearly and succinctly as possible. You will be graded on the accuracy of your answers and the application of the proper support from text/class material. Please show any and all computations required since partial credit will be given for your work (when work is shown).even if the final answer is incorrect

Capital Budgeting-Asset Replacement Assignment

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Capital Budgeting- Asset Replacement Assignment

Incremental Initial Capital Outlay

Description

Cash price for new asset acquisition

Installation costs

Incremental net working capital (see working 1)

TOTAL

Amount $

35, 500,000

750,000

34,864,000

71,114,000

Incremental Savings/Benefits

Description

Year 1. 480x 74,000units- 310x 80,000 units

Year 2. 480x 95,000 units- 310 x 60,000 units

Year 3.480x 125,000 units

Year 4.480x 105,000 units

Year 5. 480x 80,000 units

TOTAL

Less Decremented benefits

Year 1. 80,000 units x 35

Year 2. 60,000 units x 35

Year 1& 2. 15,000 units x 310 x2

14,200,00

TOTAL INCREAMENTAL BENEFITS

Amount $

10, 720,000

29,000,000

60,000,000

50,400,000

38,400,000

188,520,000

(14, 200,000)

174, 320, 000

Incremental Operating Costs

Description

Year 1. 185x 74,000 units - 125x 80,000 units

Year 2. 185x 95,000 units- 125x 60,000 units

Year 3. 185x125,000 units

Year 4. 185x105,000 units

Year 5. 185x 80,000 units

TOTAL

Amount $

3, 690,000

10,075,000

23,125,000

19,425,000

14,800,000

74, 950,000

Incremental Earnings Before Interest and Tax (EBIT) = Incremental Benefits â€“ Incremental Operating Costs. Therefore

$174, 320, 000- $74, 950,000= $ 99, 370, 000

Less incremental depreciation per annum (see working 2) $ (7,620,000)

$91, 750,000

Less Corporate Tax 35% of 91,750,000 (32,112,500)

$ 59,637,500

Add back incremental depreciation $ 7,620,000

Incremental Operating Cash flow $ 67,257,500

Incremental Salvage value $ 5, 400, 000

Incremental networking capital realized $34,864,000

Total Salvage cash $40,264,000

Treatments

Net Present Value

Total Salvage Cash flow + Operational Cash flow PVIFA (12%, 5 years)

$40,264,000+$ 67,257,500 x 3.605

$40,264,000+$242,463,287.5= $282,727,287.5

Decision Rule: Since the net present value of the project is positive, the firm should consider purchasing the asset to replace the current one (Baker, 2011; Ross, Weterfield, and Jordan, 2012).

Internal Rate of Return

IRR= L + (A-O) (H-L)

* -B)

Where L= lower rate, H= higher rate; A= positive PV, B=negative PV.

10 + (282,727,287.5- 0) (17-10)

(282,727,287.5- - 100,000,000)

10 + 5.2= 15.2%

Decision Rule: As the internal rate of return is greater than zero, the company should consider the purchase of the new technology as quite feasible (Baker, 2011).

Payback Period

Payback period = Initial Investment

Cash inflow per period

71,114,000 = 1. 06 = 1 year and 22 days.

67,257,500

Decision Rule: the management normally determines payback period in a single project. If the management considers that the payback period becomes less than 1 year and 22 days, the project will be feasible (Baker, 2011; Ross, Weterfield, and...

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